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End of the Bond Bull

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​Against a 30-year backdrop of declining inflation, interest rates have plummeted to less than zero on an inflation-adjusted basis, spawning the longest bull market for fixed income securities on record.

SUMMARY

As interest rates declined over the past three decades, investors in bonds benefited greatly. Fixed income returns have been far above historical norms. After the recent credit and financial crisis, global regulators have been struggling to put policies in place that will help prevent such events from recurring in the future. The implications for investors could be significant.

This paper examines the origins of the bond bull market as well as the events leading up to and occurring after the Great Recession. We examine the questions on the minds of many investors, including what will happen if an overwhelming number of bond investors try to exit at the same time as rates rise? What ripple effects would result from a disorderly exit? Will higher interest rates necessarily lead to higher inflation? Despite the potential for volatility and the uncertainty, we offer implications for fixed income, equities and alternative investments.

KEY TAKEAWAYS

  • Starting in the late 1980s, individuals, corporations, and governments became increasingly comfortable with using debt to finance expenses. When credit markets seized, investors of all types ran for the sidelines and a crisis of confidence nearly erupted.
  • The Fed’s substantial influence on fixed income markets in the wake of the 2008-2009 financial crisis has delayed and perhaps exacerbated the ultimate correction. Though the short term could indeed be volatile and nerve wracking, it could also present opportunities for nimble fundamental investors.
  • We believe investment strategies should incorporate diversification, asset/liability matching, fundamental bottom-up analysis, adherence to sound asset allocation ranges, active tactical adjustments, and a willingness to think outside the box to find sources of income, growth, and stores of value.

Disclosure:

These materials are provided for general education and illustration purposes only. They were prepared by Abbot Downing and have been obtained or derived from information we consider reliable, but we cannot guarantee their accuracy or completeness. Abbot Downing does not undertake to advise you of any change in the information contained in these materials.

Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of you own situation at the time your taxes are prepared.

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