Commentary | The Week Ahead: Tide turns for bond market

August 3, 2013 

The bond market is bending, taking investors with it. Every day that goes by, bond market investors figure, is one day closer to the Federal Reserve scaling back its monthly purchases of IOUs designed to keep interest rates low.

The most recent statement from the central bank left its strategy intact, but the bond market isn't waiting for the official pronouncement. Instead, a steady climb of interest rates that began in May looks to continue in the new week.

Borrowers have been lulled into complacency, thanks to five years of falling interest rates. Driven first by the near-collapse of the financial system, then by dysfunctional federal government responses and a stubbornly weak economic recovery, the Federal Reserve has taken unprecedented and untested actions to bring down the cost of cash with the goal of encouraging borrowing. Savers, meantime, have been the victims of such efforts. Investors took notice and followed the central bank into the bond market in a big, big way. More than $640 billion has been thrown at bonds in the past three years.

Those investors may be weary of the stock market, but they are not dumb. For the first time in

almost three years, mutual fund investors have taken money out of bond mutual funds two months in a row. The Investment Company Institute estimates $76 billion has been pulled from bond funds since the beginning of June. But for every $1 invested in bond funds in the previous three years, only 12 cents have been redeemed.

An orderly exit fromthe bond market by investors gives the economy time to adjust to the higher cost of borrowing. Investors, however, may not be as patient as the Federal Reserve.

Tom Hudson, a financial journalist, hosts "The Sunshine Economy" on WLRN-FM in Miami. He is the former co-anchor and managing editor of "Nightly Business Report" on public television.

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