The bond market party looks to be over.
The broadest gauge of the US bond market—the Barclays Aggregate index—posted a string of gains in the post-crisis era, as investors ditched stocks for the safety of bonds. The Federal Reserve’s effort to repress interest rates accelerated the shift, since when interest rates fall, bond prices rise. The result? The Barclays Aggregate rose 6% in 2009, 6.5% in 2010, 7.8% in 2011 and 4% in 2012.
But what the Fed giveth, the Fed can taketh away.
And it did, by starting to talk up its plans to cut back the bond buying programs its used to drive down interest rates. (The process started back on May 22.) The Barclays Aggregate index is down 3% so far this year. “The year 2013 looks on track to become the worst US bond market in 40 years,” wrote JP Morgan analysts in a recent research note.
And it may well get worse. The Fed is widely expected to announce plans to trim back its bond purchase program this afternoon, when it releases its monetary policy statement. If Fed chair Ben Bernanke tapers much more than the market expects—which is for the Fed to cut its buying by about $10 billion to $15 billion a month—look out below.