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Defining the "Perfect Bond Market Storm"
There are many EXCUSES why the bond market may be selling off. But the real reason we are seeing prices fall is because:
There are simply more sellers than buyers!
That is an economic law that everyone on the planet seems to know, but yet the "experts" on Wall Street always seem to scoff at an answer that seems to be too straightforward and simple.
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Remember, it does not matter why the price of something is falling. It is better to know WHAT is rising and WHAT is falling, rather than the reasons why something happens.If we know WHAT is rising or falling, we can take action to avoid the areas where prices are falling. And maybe improve our chances of making money if we move into areas where prices are going up, right?
We also noted that the bond market does not have the "safety valves" in place to help stem any massive sell-off in the market either. Don't forget:
The moves in the bond market are significantly sharper and more violent than moves we see in the stock market.
If you are a bondholder during a downturn, reading your monthly statements could be hazardous to your health! It can be a painful experience if you do not know what to expect, or are working with someone inexperienced or if you really need the money before maturity.
Now, many in the market are aware that electric and gas utility stocks often get clobbered when rates rise. These stocks often will offer a dividend similar to current bond yields. So when yields rise, the dividend yields of these stocks cannot move up fast enough to keep up with rising rates, and so the selling wave begins.
Also, bonds often see their prices get crushed when there is talk of inflation in the economic system. We've seen more headlines about gold, oil and other commodities moving smartly higher recently, so our "perfect bond market storm" continues to develop.
So what other areas can be affected when bond prices drop? Certainly the share prices of the stock brokers and mutual fund investment companies can fall, as a great deal of their profits come from trading bonds. Don't forget that many insurance companies will keep an extremely large amount of money invested in bonds for their own accounts. They could be affected if bond prices fall.
Any businesses that are dependent on interest rates in any way will often be affected by bond slumps. How will companies in the lending business, or in the mortgage business, hold up if rates continue to move significantly higher? How will the loans made by the banks perform if rates rise? What impact would that have on bank stocks?
Something else (and something important) that you may not realize: the largest sector of the Standard & Poor's 500 Index (S&P 500) is the financial sector. If that area of the market starts to falter, we could see an enormous spillover into the stock market!
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