Why are bond prices going down now?

Question

There's no prospect of interest rate increases in the forseeable future, so why are bond prices dropping? Does this have anything to do with investor's confidence about stocks and the economy in general? I'm puzzled. I thought bond prices were inversely related to interest rates.

Answer 1

You're correct in saying that bond prices are inversely related to interest rates... however, there are exceptions historically to that relationship. Although you don't see a prospect of interest rates on the raise, I sure do... I just mortgaged a home and the rates went up after our purchase... they remain steadily on the rise in our area (Illinois). I suspect there must be other indicators to investors that interest rates are heading upward, thus causing those bond prices to drop accordingly. It's all a matter of perception... right or wrong... and that's how the market can react. The key for bond owners is just never to pay above par for a bond that can be called away early... those who can hold the bonds until maturity (or until called) won't have to worry about their bond prices... they'll earn par.

Answer 2

Well a 3-month chart shows a long, steady decline in rates.

But the recent uptick in rates is due to the fact that investors are betting that economic data that will be released this week will be stronger than expected, signalling that the economy isn't really as weak (or headed for a "hard landing") as many are suggesting.

Answer 3

Bond prices goes down because the market sees inflation and that means increase in interest rates. Now if you believe the market is wrong then buy bonds or hold if you have them.

Answer 4

Why do you think there's no prospect of interest rate increases? Budget deficits will eventually lead to higher inflation, and higher inflation will pull interest rates up...