The stock market gets all the press, even though the bond market is much larger. The bond market, because it determines interest rates, also has a much larger impact on more people than the stock market. A generalized rise in interest rates will be “interesting,” to say the least, as Wolf Richter, at wolfstreet.com, explains.
“So, if rates rise, we get nervous. If rates fall, we get nervous. If rates stay the same, we get nervous. When don’t we get nervous? Raise the rates already! We are talking an idling .25% not 3.5% where we should be to make saving pay, and borrowing a cautionary endeavor as it should be!”
That’s the lament posted by a WOLF STREET commenter on Monday afternoon.
“Perhaps investors are getting nervous because the price action is so bad,” explained DoubleLine Capital CEO Jeffrey Gundlach on Monday about the selling pressures junk bonds have come under after Fed Chair Janet Yellen’s press conference, which had been, in his words, “a little bit of a debacle.”
He complained that Yellen had thrown uncertainty and confusion over financial markets, as Fed heads “kind of no longer have a framework” to go by.
He’s always talking up his $80-billion book, which is full of bonds. He has a lot to lose when rates rise and bonds decline in value. So he said that raising rates this year would be a “policy mistake.”
It certainly would be for him, having ridden the greatest bond bull market all the way to its peak while extracting a ton of fees along the way.
Bond-fund managers like Gundlach already had a few scares to deal with, including the “Taper Tantrum” in the summer of 2013 in reaction to the Fed’s discussions on tapering QE Infinity out of existence, then the “flash crash” in the Treasury market last October 15, and for the past year, the not-so-flash crash in energy junk bonds.
Folks have reason to be nervous about bonds.
Bonds are supposed to be a conservative investment, safer and more predictable than stocks and a host of other asset classes. But bonds are on edge, and investors can see it. And they can see the sheer magnitude of it.
In 2000, the US stock market was valued at $15 trillion and the US bond market at $17.3 trillion, according to the Wall Street Journal. By this year, US stock market capitalization has jumped 76% to $26.3 trillion. But bond market capitalization has soared 125% to $39.5 trillion.
That increase in the bond market was driven largely by enormous, record-breaking issuance by corporate and government entities.
To continue reading: The US Bond Market is far Larger than the Stock Market
