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Interest Rates , Investing

Bond Market's (Lack of) Volatility: "Calm Before the Craze"

"It would only take a small rise in rates to decimate the value of bonds bought at par or higher."

by Bob Stokes
Updated: August 27, 2020

Today's historic near-zero interest rates may have many people forgetting that rates can just as easily go higher.

Back in 1981, for example, interest rates were around 20% for a time. Of course, that was a historic extreme as well -- except on the other side of the spectrum.

However, as you probably have observed, extremes in financial markets generally do not persist indefinitely. Throughout the remainder of the '80s, rates trended downward, reaching about 8% by the end of that decade.

Yet, many bond-market observers expect today's very low interest-rate trend to just keep on keeping on.

Here's a chart and commentary from our August Elliott Wave Financial Forecast:

Calm Before the Craze

The chart of the ICE BofA Move Index, a measure of implied bond market volatility, is at a record low. Investors believe it will be smooth sailing into the future. The chief investment officer of an on-line brokerage firm expressed the optimism toward low rates this way: "We are moving from low for longer to low forever."

Keep in mind what our July Financial Forecast noted: Because of a record extreme in duration risk, it would only take a small rise in rates to decimate the value of bonds bought at par or higher.

The July Financial Forecast explains with this chart and commentary:

Record Risk

Bond duration is a measure of how sensitive prices are to a move in interest rates. A long duration relative to low rates indicates a greater risk of a price decline when interest rates rise. Bond investors are now making a hugely dangerous bet that interest rates will stay low forever. It is dangerous because, as the chart shows, there has never been a time in history when there is a greater risk of loss during a trend of rising rates.

The lower interest rate trend has been going on for a whopping 39 years now, and of course, it's possible that it will persist for a while longer.

Indeed, on July 31, a major financial magazine stated its interest-rate forecast in this headline (Kiplinger's):

Long Rates Still Staying Below 1%--for a Long Time

There's no waffling in that forecast! It doesn't get much more definitive than that.

However, you may also want to learn what EWI's analysts are saying about the Elliott wave pattern of 30-year U.S. Treasury bonds -- and, by extension, bond yields and interest rates.

Looking back at this moment, you may be very happy that you did so.

Follow the link below to start your 30-day, risk-free access to our latest forecasts.

There's No "Safety in Numbers" in the Stock Market

In fact, it's usually the reverse. Meaning, financial history shows that investing with the "crowd" will generally put you on the wrong side of important market turns.

So -- an investor must think and act independently from the crowd.

Elliott wave analysis is ruthlessly objective -- and helps investors avoid the mistake of getting swept up by the prevailing sentiment.

Learn what our Elliott wave experts expect next for stocks.

You can do so, risk-free for 30 days. Learn more by following the link below.