TREMBLING TREASURIES RICK TOBIN
Bonds are glorified “IOUs” from governments or companies to investors. Bond-holders are only entitled to a
repayment of their principal amount when the bond matures. This can put an upper limit or ceiling on the
amount of price appreciation for bonds held by investors today.
Bond prices are falling today partly due to the Fed’s implied “tapering” threat that they may begin decreasing
the amount of stocks, bonds, and mortgages that the Fed may purchase each month. Allegedly, the Fed
purchases upwards of $85 billion per month of both Treasuries and Mortgage Bonds, so their investment
percentages of the overall market are quite significant.
In a rising interest rate market world as today, even though rates are still near historical all-time lows, new
bond investors can purchase bonds which offer higher rates and income. For bond holders who currently own
bonds at much lower rates from last year, then these same bond investors will have less future buyers for their
existing bonds (or “IOUs”).
In basic Economic theories, a decreased number of buyers tends to historically lead to falling prices for any
type of product whether it be a bond, real estate, or lemonade from a child’s corner stand. For bonds, falling
prices then, in turn, leads to rising Treasury Yields since prices and yields are inverse to one another, and are
akin to being on a “see saw.”