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Mark DelPezzo
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Rough Seas Ahead May 2015

 Like the last few hurricane seasons in the great state of Florida, the bond market has not had a bear market in quite a spell.  Like our dreaded season, we hear the forecast of 8 -10 storms and have been lulled to sleep by the good fortune over the past several years.  In my opinion, this describes most investment funds in the bond market on a global basis.  This is especially true for investors in ETF’s and mutual funds that do not have a stated maturity!  It has been a long time since rates have trended higher, so let’s start the discussion with a graph showing what happened in 1993 to 1995 and the impact on Treasury prices.  For this illustration, I will use a BB graph of an actual 20 year maturity US Treasury security price and yield. 

 BB graph of 20 year U.S. Treasury in time frame 1993-1995 (read graphs left to right)

As the treasury graph shows , the move in price was from the high point in October 1993 of 115 to the low point in November of 1994 of 90  – a negative decline in the price of the security of -22%!  This move down in price coincided with a rise in yields on the security of 2.25% or 225 basis points.  Over this time frame, the Federal Funds rate was raised from around 3% to 5.5% or 250 basis points.  This is one of the few times over the past 30 years that the Federal Reserve was in a rate raising mode.  Today’s investors need to be aware of the risks inherent in bonds and prepare now to navigate the coming storm!