Investors Turn to Bonds as Stocks Continue Their Slump

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By Jacob Maslow

Bear Market Trend
A literal depiction of a typical bear market showing statuettes cast in gold of a downward trending graph with a bear emerging from the end

Bonds rallied on Tuesday as stocks continued their extended slump and oil prices dropped below $50 a barrel. U.S. 30-year Treasury bonds are posting their biggest rally yet just six days into the new year despite the Federal Reserve’s plan to raise interest rates in 2015. With an uncertain market and oil prices plummeting, investors are fleeing from stocks and running to bonds.

Yields for thirty-year bonds dropped to 2.52 percent, the lowest level since 2012. Ten-year bonds dropped to 2.25% on December 26 and hit a low of 1.89% on Tuesday. The move to bonds is troublesome news for the stock market. When yields hit the 2 percent mark, investors are accepting an interest rate that will ultimately lose them money (U.S. inflation hovers at about 2 percent).

Investors are worried. They’re fleeing from stocks and investing in bonds. Markets aren’t fond of uncertainty. Oil prices are now trading below $50 a barrel, and some experts are predicting that it will fall as low as $30. The uncertainty of oil prices has investors concerned. But it’s not just oil that has investors worried; Europe is still teetering on the verge of recession and political turmoil will restrain inflation around the globe.

Yet U.S. bonds performed surprisingly well in 2014. The Federal Reserve closed its bond-buying program last year, and they’ve hinted at raising interest rates in 2015. Everyone expected yields to rise and bond prices to fall. But the complete opposite happened. Although the yield wasn’t great, foreign investors still prefer the safety of investing in American bonds.

There’s a great deal of concern in Europe right now. So much so that Germany’s 1-year and 5-year bonds as well as France’s 1-year and 3-year bonds are both in the negative. In other words, investors are paying to hold these bonds.

Uncertainty in Europe, falling oil prices and fears of deflation are drawing investors to the safety of U.S. bonds. But despite this fact, there are still some investors who view the market dip as a gift and will continue to trade despite the extended slump.

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