Financial Crisis in Confidence Affects Bond Investments

There are two things that are negative indicators for the bond market. Many people know these things but they are worth repeating.

In the first place, interest rates are essentially at zero that means that interest rates have nowhere to go but up. When interest rates go up the value of bonds go down because the lower interest rate bond must sacrifice principal to be competitive with the bonds with higher rates.

Bernanke is doing everything he possibly can to keep rates down, but even in the face of his spending hundreds of billions of dollars or promising to do so, investors are so concerned with the financial condition of the United States that rates are going up and in my opinion they will continue to do so.

On top of that is the fact that many government entities are broke. The federal government is broke, but they have a back door, which is a printing press at the Federal Reserve. This will be slammed shut here at some point but city, county and state governments don’t have that press.

I’m not saying that all of these government entities are broke; but some will default on bonds. Government entities are facing the worst financial conditions since the Great Depression and some of them will default on their bonds.

Bottom line: bond investments are not good investments in this environment: interest rates will be going up and many government entities will be going broke.

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