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How investors can deal with the bond market downturn

Look at it this way. The Fed has already told us that it expects the federal funds rate to exceed 2.25% within the next year or two. Thus, the yield on two-year Treasury bills has more than tripled since December 31, rising from 0.73% to around 2.45%. Because prices move in the opposite direction to interest rates, the value of Treasury bonds has fallen.

I keep hearing about “reversals” in the bond market. What is all this about?

While the Fed has intervened extensively across the bond market, it has less influence on longer-term bonds — those for, say, five, 10, or 30 years. Their yields have not risen as quickly as those of shorter-term securities. In fact, some short-term rates have already exceeded those on longer-term bonds. When this happens, as the jargon says, there is a “yield curve inversion”.

The reversals suggest traders doubt the Fed can continue to raise interest rates as the economic impact will be too severe.

Yield curve inversions sometimes, but not always, predict recessions. So far, the signals are hazy, said Richard Bernstein, the former chief investment strategist at Merrill Lynch who now runs his own firm, Richard Bernstein Advisors.

“The Fed has many options available to it before we face a recession,” he said, adding that he doesn’t expect a recession any time soon but thinks inflation will remain fairly high. Bernstein therefore suggests that in addition to bonds, investors should hold assets that “tend to thrive in high inflation environments, such as commodities, real estate or certain types of stocks, such as in the energy, materials or defence”. .”

I hold treasury bonds directly, not through mutual funds or ETFs. Did I lose money?

No, unless you sell the bonds, you won’t lose a penny.

The US government stands behind all Treasury bills. In a crisis, investors all over the planet buy them for this reason.