The benchmark bond index that we follow, Barclays U.S. Government/Credit Index, lost 2.5%, the worst quarter since 1994. In fact the quarterly result has only been worse 8 times in the past 40+ years (162 quarters).
The Barclays U.S. TIPS Index had its worst quarter ever losing 7.1% (data only goes back to 1997).
Markets do not like surprises – even when the information is not really a surprise. The financial media has dubbed it the Taper Tantrum, which started when Ben Bernanke came out of the Fed’s June meeting and said the Fed would taper its purchases of long-term bonds, if the economy continues to improve. The so-called quantitative easing program was intended to hold down long-term interest rates to encourage investment, lending, and economic growth.
The market was surprised by Bernanke’s comments, and long-term interest rates immediately jumped.
Morningstar recently reported, “Over the past two-plus weeks, many bond investors have headed for the exits, on the heels of Federal Reserve Bank chairman Ben Bernanke disclosing plans to end quantitative easing.” This suggests that market participants were assuming the Fed would continue its bond buying indefinitely.
Two things strike me as very ironic:
There is little doubt that markets will continue to be volatile as the Fed proceeds to unwind the unprecedented monetary policy currently in place. Market participants will try to predict what is going to happen (interest rates will rise – that’s easy); when it is going to happen (more difficult); and how to take advantage (approaching impossible).
There has been a general consensus that interest rates must rise since the Fed took short-term rates to zero at the end of 2008. Since January 2009 the bond index has provided an annual return of 4.8%, including the most recent quarter, while money market funds and short-term CDs have provided almost no return. Once again illustrating our long-held beliefs:
Other articles filed under Family Finances
September 1, 2016
It’s no surprise that this year’s U.S. presidential race has become a subject of conversation around the globe. In “Why Our Social Feeds are Full of Politics,” Canadian digital marketing executive Tara Hunt observes, “American politics, it seems, makes for...
August 19, 2016
We all know the importance of getting your finances in order and creating a financial plan when you are on the brink of retirement. However, creating a “leisure plan” can be just as important to a successful retirement. This recent...
July 20, 2016
Stock Markets Just look at the short-term variability in the various equity indices shown in the accompanying chart. It shows how markets behave through time – some markets are up substantially while others are down. Of course, this variability is...
July 18, 2016
Although our name is Rockbridge Investment Management, there are many services that we provide to our clients beyond managing investments. We wanted to share just a few of these additional skills with our clients. General Questions We are here for...
July 14, 2016
The recent vote in Britain to exit the European Union is yet another reminder of how markets often react negatively to surprises. We cannot help but ask ourselves, “Is it different this time? Maybe this is the event that upends...