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Can the Bond Market Crash?

Economy

Can the Bond Market Crash?

by | Economy

Ben Constanty

CEO, Smartlink

Disrupting online payments with smart contracts.

To answer the question of whether or not the bond market can crash, we first need to lay the foundation of what the bond market is.

The bond market, also known as the Debt market, is a way for the issuer to raise capital, in this case the Government.

They issue bonds at different time lengths and investors are given yield, with the principal balance being repaid at the end of the term.

The reason people look towards the bond market for indications is bonds are closely tied to the cost of money. Also, bonds are usually used as a hedge against market volatility.

Since the housing crash of 2008, the yield on bonds have quickly neared zero, begging the question of sustainability.

🔎 Key takeaways

  • Government bond yields have been close to 0% for over a year
  • There is a strong probability for government bond yields to go negative in the near future
  • Corporate bonds are riskier but yields are more competitive than government bonds

Government Bonds

Bond market is going negative

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Let’s touch on Government bonds or Treasuries. Will the bond market crash? The short answer is almost a certain no.

To put this into perspective, if the United States Government defaulted on their bonds, it would indicate that the Government is no longer able to repay its debt.

The amount of U.S. Dollar issued in debt is in the trillions, and it would immediately destroy the global economy.

Now, a more realistic question is can we expect increased volatility with the potential for negative rates? Sure, that is a real possibility.

The Fed has come out and said on multiple occasions that negative rates would negatively impact the economy long-term. But, when nothing else works the Fed may have no other option.

Other countries have been in negative rate territory for quite some time.

Bonds yield negative rates in some countries

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Financial institutions would be impacted the most because deposit accounts would be forced to charge depositors, meaning you would have to pay to keep money in a savings account.

Corporate Bonds

Another bond market to monitor is the corporate bond market. This is when companies such as Apple issue debt to investors.

Apple bonds yield 3%

Market insider

The attraction to these markets is higher yields. When investors struggle to earn 1% on Government debt, corporate bonds become more attractive.

For large and well-established companies such as Apple, the credit risk is much lower than a small cap company.

So, when a corporation issues bonds at 3.5% for example, that becomes much more competitive and worthwhile.

However, the problem is with rates so low there are many companies willing to issue bonds that are significantly riskier.

Also known as “Junk Bonds”, it is important to monitor these because if default rates rise, we could be entering a period of increased credit risk, impacting the pricing of all corporate bonds.

To answer the question, no, the bond market is extremely unlikely to crash. The other question of negative rates and increased volatility, that is very much a possibility.

With the U.S. election in full focus and stimulus talks continuing, investors are waiting on pins and needles.

How to hedge against bonds, you can simply remain in cash. People tend to forget cash is a position. Also, precious metals can be a place to store some wealth.

Right now, bonds are priced near zero with a high potential to turn negative.

Ben Constanty

CEO, Smartlink

Disrupting online
payments with smart contracts.

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