Bond Market Updates
It was an interesting month for a bond market. The interest rates on 10-year American Treasuries have risen from ~1.10% to ~1.45% during February. Bonds are low-risk assets, some people even call them risk-free assets. When interest rates go up, the value of the bonds goes down. This can mean many things, such as:
- People are less interested in risk-free assets because they’re optimistic about the future of the economy, so they want to put their money into more risky and profitable assets.
- People expect more inflation in the future and demand some compensation.
Many factors can be at play at any given time. Let’s not forget that the Fed has been quite pro-inflationary lately. That doesn’t mean people aren’t optimistic about the end of the Coronavirus pandemic, for example. They have a reason to be optimistic, after all.
The main issue with rising interest rates is the fact that a lot of countries and corporations have a huge amount of debt. It’s not a problem when the interest rates are near zero, but it’s hard to find money to pay interest on your loans once the rates go up. The corporations may be forced to cut their spending, the governments may introduce austerity measures and all of those things slow down the rate of economic growth. Needless to say, it never fully recovered from the Great Recession, and the perspective of further slowdown might blow up our already unstable political systems.