CHICAGO (Reuters) – For investors who piled into bond funds this year, the past week has been an abject lesson of how to get bruised in short order.
An uptick in yields smacked bond prices, which move inversely to yields. Funds investing in high-yield and long-maturity issues got hit the worst. Yields on 10-year Treasury Notes hit a peak of 2.23 percent, the highest since April of last year, before dropping to 2.16 percent on Wednesday.
The pre-June bond swoon is a harbinger of things to come. The U.S. economy is heating up after years of decline, which will trigger greater demand for credit and lower bond prices.
The good news? There are a bevy of alternative vehicles to help you hedge bond price surges.
But first, some things to consider: Bond yields have largely been watered down by the Federal Reserve’s bond-buying program in an effort to grow employment and the economy since the 2008 market and credit meltdown. The U.S. economy grew 1.7 percent in 2011 and 2.2 percent last year.