How did bonds recover after 1994 and would it be worth it to invest some money in them if there is a huge correction?
Good question. We need to start with a look-see at 1994.
"Between January and September 1994, the U.S. 30-year long bond’s yield jumped more than 150 basis points to 7.75%. The proximate trigger was a Federal Reserve rate hike as it started to tighten policy following recovery from the 1991 recession. But while changes in inflation and official interest rate expectations might have had a little to do with the U.S. bond market’s performance, they weren’t really behind the generalized bond market selloff, according to a Bank for International Settlements post mortem the following year.
Instead, it seemed that the bond market’s own internal dynamics had more to do with the widespread selling than any macroeconomic factors — volatilities across major markets jumped between 10 and 20 percentage points, whatever the local factors." (Mash here.
Table of Intermediate returns
: Image: http://i.i.com.com/cnwk.1d/i/tim2/2013/05/29/fed-funds-rate-increase-052913.jpg
'...jumped between 10 and 20 percentage points'? A bond market? That only says one thing to me: leverage. So what we're asking is, "Is the current bond market volatility due to anticipated interest rate hikes from the Fed or too many players with too many option calls?" Yeah.
With no current sign of inflation increasing or even yawning and stretching, would the Fed increase anyway in order to re-inflate rates? Without the underlying increase in real inflation? That would mean the Fed would pay higher interest with un-inflated dollars. Uh, no.
So should we look at 1994 for insight to today's bond market? Yes, we can. But it may be better to look at 1995.
This post was edited on 6/10 at 3:55 am