While the wild gyrations of the stock market usually capture the lion’s share of attention; something beneath the surface was happening in the bond market as a result of Coronavirus (COVID-19) pandemic.
I’ve talked a lot about how to reduce your risk of getting Coronavirus. And also items you need to have on hand; if you unfortunately contract it.
Why Is The Bond Market Important?
Personally, I track the Bond market more closely than the stock market due to the fact that the underlying data tells a much different story with respect to health of the economy.
The Bond market is more efficient due to Bond ratings, interest rate derivatives, credit worthiness, publication of bond-yield curves, spreads and the predominance of long-term institutional investors.
The returns for the Bond market over the last 40 years has been insane. Every time we believe we have reached a floor with respect to rates; they still go lower. A falling interest rate environment in most of the developed world has resulted in spectacular returns for bonds.
Before the March 15th, 2020 cut; the intermediate term Treasuries (average duration of 7-8 years) had around 3% upside if the 10 year yield goes all the way to zero. Now unless we go negative, which a lot of bond traders are expecting; it is hard to find a good way to make money in bonds.
Although rates might go negative and there might be more upside; I prefer to cash out of my Bonds now. I have moved the Bond portion of my Portfolio to follow the rest of my Emergency Fund earning 8% interest
Will Inflation rise in the future as part of the Fed action?
Effect of Fed Reserve RequirementsThe most under reported part in the Fed announcement which went unnoticed was that the reserve requirements have been cut to zero.
As part of the COVID-19 (Coronavirus); the world has realized the extent to which it is dependent on China for manufacturing.
Everything from masks to gloves to personal protective equipment (PPE) is manufactured in China.
Even medicines depend on chemicals which are manufactured in China.