REI Wealth Monthly Issue 13 | Page 39

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.”