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
April 19, 2018
As another tax season comes to a close, we wanted to draw attention to a number of scams and schemes to defraud unsuspecting taxpayers. We think it is important that our clients be aware of how these scams work, and...
April 17, 2018
It’s common for investors to feel nervous when looking at investments by themselves. Are you saving enough? Are you saving in the right place? Are you holding the right mix of investments? Should you own individual stocks or funds? Are...
April 6, 2018
The markets have seen several ups and downs over the years, but remember - Volatility is normal. At Rockbridge, we believe financial advisors play a vital role in helping you understand what you can control while providing expertise, perspective and...
March 20, 2018
Estate planning has often had an air of mystery to some people. The terms used and bantered about by lawyers or planning professionals are not words we use in everyday conversations. Do you have heirs? Answer: No you don’t –...
February 23, 2018
It’s tax time again and as you gather your W2s, 1099s, and maybe even your K-1s, we thought it would be a good time to explain our income tax planning approach. Income tax planning is a crucial aspect of the...