By Mary Anne & Pamela Aden
The interest-rate talk seems never ending. It goes on and on, and we've never seen anything like it. The result of all of this talk on the bond market is not a surprising one. But more on the chatter.
The markets are literally obsessed with what the Fed's going to do, or not do. Any hint of a possible upcoming interest-rate hike sends the markets reeling one way. And when it looks like interest rates are not going to rise, the markets swing the other way.
But despite all the gossip and guesses, the bond market has spoken, and here's what it's telling us.
Bond prices are on the rise, and they're currently near a four-month high (see chart below). Since long-term interest rates move opposite to bond prices, long-term rates are now at a four-month low.
So this current interest-rate decline strongly suggests the Fed is unlikely to raise interest rates in September, and probably not even later this year. This also means bond prices are set to rise further, and the bull market will remain intact.
As our dear friend Chuck Butler reminds us, "Back in 2013, the Fed told us that when unemployment hit 6.2% they would hike interest rates. But that didn't happen.
Then by the end of 2013, the Fed told us there would be a rate hike in 2014. But that didn't happen. Then late in 2014, the Fed said by spring 2015 they would hike rates. But that didn't happen. Then the rate hike was moved to summer 2015. Again, that didn't happen.”
So what's going on? The answer is pretty simple. Even though Janet Yellen would like to raise interest rates and return to a normal monetary policy, she can't. Aside from the still-sluggish economy and deflationary pressures, inflation has remained below 2% for over three years, and the IMF thinks it's going to stay there until 2018.
In addition, there are serious concerns about China's slower economy and the slowing global economy. Plus, China's wild stock market and yuan devaluation, as well as the volatile swings in most of the world stock markets, have spooked investors. This alone has again boosted the appeal of U.S. government bonds as a favorite safe haven, which is why they've been rising.
The bottom line is this: If you're holding long-term U.S .government bonds, keep them. They're looking good for the months ahead. We also like the Ultra 20+ Treasury /zigman2/quotes/207070561/composite UBT -2.98% and the 20+ Treasury bond /zigman2/quotes/206026314/composite TLT -1.50% , which have been top performing bond ETFs.