By Christopher Whittall
This year, many investors in long-dated bonds have gone, on paper, from raking in stellar returns to nursing hefty losses.
Years of ultraloose monetary policy pushed down yields and allowed governments and companies to borrow money at record-low rates for ever-longer periods.
Yield-starved investors snapped up bonds as long as a century. The belief that central banks would continue to buoy markets through their stimulus programs -- largely bond buying and low rates -- boosted these long-dated securities throughout the first half of the year.
Long-dated securities are a high-risk, high-reward wager. As a rule of thumb, the longer a bond's maturity, the more sensitive it is to changes in market interest rates. That means these securities tend to record outsize returns when fixed-income markets are rallying and yields are falling -- and suffer markedly when bond markets reverse.
The downside for these investors began this summer when prices started to fall. Tentative signs of a pickup in U.S. inflation and growth as well as expectations of more fiscal stimulus and less central-bank easing sent bond yields higher as prices declined. The election of Donald Trump cemented the trend, with markets betting the president-elect's plans for lower taxes and more fiscal spending would boost inflation and growth, which would hurt bonds.
Of course. long bond prices may pick up again if a meaningful uptick in inflation and growth fail to materialize. And many investors predict that in any event, rates will stay low by historical standards, given factors such as aging populations and the global savings glut, which can slow economic momentum and keepbond yields depressed.
But if inflation does increase or the Federal Reserve raises interest rates at a faster pace than expected, bond prices could fall further. Those who have locked in slender yields for as long as 100 years will see the value of their investments shrink as inflation eats into their returns.
The Fed was in focus on Wednesday when it raised interest rates for the first time in a year and signaled officials now expect to increase rates more often in 2017. Short-dated bonds, which are most sensitive to rate changes, bore the brunt of the selloff, with the yield on the two-year note hitting a seven-year high. But 10-year yields also climbed, hitting a two-year high of 2.523%.
(END) Dow Jones Newswires
December 14, 2016 19:21 ET (00:21 GMT)
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