Bond Investing and Reflection Essay

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Bonds

I do not feel that now is a good time to invest in long-term bonds. The reason is this – the value of long-term bonds decreases as interest rates increase. As this looks like an increasing interest rate environment, long-term bonds look like they would come with an opportunity cost. Short-term bonds would be a better investment in this environment..

There is a Federal Reserve rate increase expected this week, but that has already been priced into the bond market (Robb, 2017). The idea of the Fed increase is that it will place a constraint on economic growth, in which case the current economic expansion will continue "at a steady pace without overheating" (Robb, 2017). Indeed, the Fed has already cautioned that if the market does not respond with slowing conditions that "All else equal, an easing of financial conditions may warrant a somewhat steeper policy rate path." (Robb, 2017). Thus, the current condition is that rates are going to increase, but they will likely have to increase again, and perhaps at a faster rate than is currently built into long-term bond prices.

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There is, however, the question of whether or not a new tax plan will be passed, and given how poorly conceived it apparently is, whether that would create an economic boom as its backers hope or whether it would create negative economic conditions as all rational analysis indicates. That would probably lead more towards a collapse in economic growth, which would mean that rates are reduced. The impact of changes to the tax code would take some time to materialize, however, meaning that even if one believed current fiscal policy is going to harm the economy, that the time to buy long-term bonds is probably further down the road when rates are higher, and those higher rates can be locked in for the long-run.

Overall, the analysis that is available now, in absence of speculation about potential fiscal policy changes and their impacts, says that we are currently in an increasing rate environment, which is a bad time to buy long-term bonds.
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