Because of our focus on managing risk, fixed-income clients of Wenning Investments generally fared well during last week’s sovereign debt crisis, even though it created widespread panic in global markets around the world.
Clients who hold a short bond position (TBT, PST) saw an unfavorable drop in prices, but we believe that the drop is temporary. The position is held to provide a hedge against rising interest rates. Interest rates fell last Thursday, but the overall trend is for interest rates to rise.
Other bond holders benefited from a decline in yields, which made the bonds they hold more attractive, since bond prices moved higher during the flight to safety.
During times of uncertainty, investors buy bonds to add protection to their portfolios and to avoid losses from falling stock prices. When that happens, bond yields are driven lower, because the demand for bonds outweighs the supply.
Thursday, during the flight to safety, the 10-Year Treasury yield fell to 3.24%, down from 4% last month. Today, though, the yield is inching back and is at 3.56%.
According to The Wall Street Journal, “The European Union agreed on an audacious $955 billion bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece.”
This agreement has calmed fears around the globe and global stock markets are trending higher on the news.