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Rush to Buy Bonds

The stock market seems ready to fall and there is a rush to buy bonds. Bloomberg reports that bonds jump up in price as stocks slip.

“It’s a lot of little factors here that add up to one big mess, frankly,” said Michael Block, chief equity strategist at Rhino Trading Partners LLC in New York. “Think about it like little tremors indicating an earthquake – crude price, copper price, overall index volatility, weakening data, retail sales data. Global growth is threatened.”

Bonds rallied as the drop in metals and oil prices damped the outlook for inflation, boosting the allure of fixed-income assets. Annual inflation in France fell to 0.1 percent in December, the slowest since 2009, data today showed.

The U.S. 30-year yield fell as much as 11 basis points, or 0.11 percentage point, to 2.39 percent today, below the record 2.44 percent set in July 2012. Ten-year Treasury yields dropped five basis points to 1.85 percent. Yields in Japan and Australia, France and the U.K. also fell to record lows.

American bonds have climbed this month as Fed policy makers said they will take a measured approach to raising benchmark interest rates. Longer-dated bonds have returned 5.6 percent this year, according to Bank of America Merrill Lynch Index data, while the S&P 500 has lost 2.3 percent.

The point of all this being concern about the global economy and the stock market. Investors are willing to take a low interest rate along with a guaranteed return of capital due their uncertainty about various markets around the world, including that in the USA. Anyone in a rush to buy bonds in the USA is not expecting the Fed to raise rates very soon!

Rush to Buy Bonds and Subsequent Lower Rates

Following the law of supply and demand bond yields are falling due to the current rush to buy bonds. The Wall Street Journal reports that bond yields are at new lows.

Investors piled into relatively safe government bonds in the developed world on Wednesday, sending many bond yields to record lows, as a bigger-than-forecast decline in U.S. consumer spending added to concerns over the global economic outlook.

In the U.S., the yield on the 30-year Treasury bond fell to a record low and the yield on the benchmark 10-year note declined to the lowest level since May 2013. Bond prices rise as yields fall.

The yields on the 10-year government bonds in Japan, Germany, France, Canada and Switzerland all fell to record lows. The yield on the 10-year U.K. government bond declined to the lowest level since 2012.

The rationale for buying European bonds is that the upcoming quantitative easing program will drive rates down and raise the face value of bonds purchased now. The rationale for buying bonds in the USA is that you do not trust the stock market to continue on an upward course and that you believe that economic problems in Europe, Japan and China will result in reduced growth and economic decline at home as well.

A Unique Niche in the UK

Pensioner bonds are the rage today in the UK. The Financial Times reports that

The National Savings & Investments website crashed on Thursday following high demand for government savings bonds offering market-leading interest rates exclusively to the over-65s.

The bonds, announced by chancellor George Osborne in December, offer savers interest of 2.8 per cent over one year and a fixed annual interest rate of 4 per cent over three years.

By comparison three year UK government bonds are paying a shade more than two percent. Again, the issue is distrust in the economy. The rush to buy bonds is a rush to safety by people who remember all too well that pain and suffering brought on by the last market crash.

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