The Week Ahead: Bond market's changes are going unnoticed

January 4, 2014 

Please forgive my fellow financial journalists for their obsession with big round numbers. Headlines howl and breaking news alerts on TV are issued when stock indices hit levels with several zeros.

But when those round numbers are small, they tend not to get the same hyped-up attention, especially if they are related to interest rates.

While the remarkable gains of the stock market in 2013 garnered deserved attention at the end of the year, something else was happening in the much larger bond market. The U.S. government's IOUs were dropping in price, resulting in a rise in interest rates. There were more sellers than buyers. Two bond benchmarks are at or near round numbers. The 10-year U.S. government bond closed out 2013 just above 3 percent. And watch next week for the 30-year U.S. government to climb above 4 percent.

Bond values have been falling (and interest rates rising) for six consecutive weeks, marking the longest losing streak for bond investors in six months. Bond mutual fund investors have been selling, pulling $23.7 billion out of taxable bond funds in the final six months of the year, according to the Investment Company Institute. After 20 years of a bull market in bonds, the smart money may be leaving.

As data on the U.S. economy show strength and as the Federal Reserve winds down its extraordinary efforts to tamp down long-term interest rates, the cost of borrowing cash likely will rise. The hope is borrowing rates will rise slowly and remain near historically low round numbers. But if those round numbers for interest rates starting gaining and fast, it will be more than media headlines howling.

Financial journalist Tom Hudson, who hosts "The Sunshine Economy" on WLRN-FM in Miami, where he is the vice president of news, can be folowed on Twitter@HudsonsView.

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