Nonprofit organizations tend to be heavily invested in treasury bonds because of their low volatility and relatively guaranteed return. The bull market combined with low interest rates and slow economic recovery has kept bonds in the limelight. But is it always going to be that way?
It’s fair to say that the bull market has to come to an end at some point. Whether it’s sooner or later is up for rowdy debate. Part of the beauty (and pain) of the market is that it isn’t as predictable as we might wish.
There is always debate and postulation, but this week has seen a significant increase on both sides because of the U.S. hitting its debt ceiling. The ceiling can be raised – it wouldn’t be the first time (in fact, it would be the 52nd time), and spending can be cut, but fears are being driven by the threat of default. Default would make the U.S. a “fiscally irresponsible borrower” according to Robert Rodriguez, Chief Executive of First Pacific Advisors. Rising inflation could also cause current yields to be paid off with money that is worth less causing returns to fall, as Carmen Reinhard of Peterson Institute for International Economics asserts.
Whether we are dealing with another rapture (or subsequent lack thereof) remains to be seen, but bondholders should, at a minimum, be aware that their heretofore stalwart investment vehicle may be subject to increased volatility.