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How Does The Bond Market Affect Interest Rates?

June 10, 2007 by Thomas Mullooly

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Look At The Bond Market

Hate being the party pooper, but I think it’s important to remind people that when interest rates start to creep up, that’s usually a sign that the party in the stock market may be taking a pause, or even coming to a close.

Look at what’s happening in the bond market right now.

The projected yield on the five-year Treasury note has jumped from 4.4% in March (just three months ago) to 4.9% today. Most of this move has happened in the last two weeks.

The yield on the 10 year Treasury note has made a significant leap from 4.25% six months ago and has shot up to 4.95%.

The 30 year Treasury bond has followed nearly the same path. Yields have moved from 4.6% three months ago to 5.05% today.

So short-term — and long-term — interest rates are moving up. It doesn’t matter why. Economists will come up with dozens of reasons and explanations. What matters is that we know what’s happening, and how it can affect us.

When rates rise, like we are seeing right now, we start to see money drift OUT of the stock market and back into fixed income investments like CDs and bonds. That is because these fixed income investments can now start to offer higher rates, with somewhat less risk than the stock market.

This kind of wave usually starts as a dribble, then a gush and finally a tsunami.

So we will continue to ladder our fixed income dollars in short term CDs (3, 6, 9 and 12 months) and pick up higher and higher rates. When rates finally begin to crest, then we’ll consider investing in longer-term bonds. Not before then.

Tom

Thomas Mullooly
Mullooly Asset Management LLC
Our Only Business Is Fee-Only Investment Advice
www.mullooly.net

 

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Filed Under: Asset Management Tagged With: Bonds, Fixed income investments, interest rates

About Thomas Mullooly

Thomas Mullooly is owner and founder of Mullooly Asset Management, Inc. In 2002 Tom opened Mullooly Asset Management, a fee-only investment advisory firm. As an investment advisor, and not a broker, Tom works strictly for his clients. With the help of point and figure charting, Tom builds a realistic game plan for clients.

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