The new bond market: bigger, riskier and more fragile than ever

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Posted on: Monday, September 7, 2020 7:36:00 PM EDT

WSJ article Review 1-week 3: Topic: Bond Market

1. Title, Author, and Date of Publication

Title: “The New Bond Market: Bigger, Riskier, and More Fragile Than Ever”

Author: Colin Barr Date of Publication: 10/5/2015

2. Author’s Purpose

            Barr’s (2015) purpose of this article is to educate readers about the changes that occurred in the bond market. In addition, he is trying to educate readers about how these changes will affect their investments in the bond market. The bond market is among the biggest financial markets in the world that is equivalent to 1.5 of the U.S. stock market (Barr, 2015). It is also nearly twice the aggregate size of the five largest foreign stock markets. Changes in the bond market would affect both domestically as well as foreign economies as there are investors worldwide in the U.S. bond market. Therefore, it is important for all investors to understand the changes occurring within the bond market.

3. Summary of Article

            This article starts by describing how large the bond market as it is among the biggest financial markets in the world. According to the Securities Industry and Financial Market Association, there were $39.5 trillion in outstanding bonds in mid-2015. Bonds have historically been easily predictable and a relatively safe investment; however, due to price reversals and trading disruptions, bonds may be threatened. Massive debt issuance and investor risk taking has fueled low interest rates (Barr, 2015). This can affect how bonds are bought and sold. Due to low interest rates, the Federal Reserve is preparing to raise interest rates putting the bond market under scrutiny. If interest rates rose, it would be costlier to repay loans and bonds domestically as the Fed is tightening the financial market. This would put additional stress on large borrowers, which would lead to new risks in the bond market. Regulators are concerned that investors may not understand what is in their funds (Barr, 2015). This would lead to market downsizing and may lead to rising redemptions of fund shares. Then this would pressure funds to sell assets to raise cash and amplify selling pressure across the market.

            On one hand, events like the “taper tantrum” in 2013 and the “flash crash” in 2014 shows analysts and traders that the bond market is alarmingly fragile and is highly associated with stocks and commodities (Barr, 2015). On the other hand, the bond market can make a come back on without intervention. Trading in the 10-year German bund is an example of this. On April 17th, the yield on the bund plunged to 0.05% (Barr, 2015). Three weeks later, it rose to 0.786% “without a major news event or apparent brad shift in investor sentiment” (Barr, 2015, p. 4).

            The article concludes by stating this greater volatility is “the price investors pay for progress” (Barr, 2015, p.4). Due to recent low interest rates the Fed is considering raising, the investors in the bond market may get a chance to determine how comfortable they are with the trade off.

4. Questions

            This article raises many questions regarding the bond market and the Fed’s interventions with interest rates. Individual investors can take the information provided in this article and complete further research how the changes in the bond market will affect them. These are a few questions that arise as a result of this article.

· While this article does explain how the changes in the bond market will affect the industry as a whole but how will individual investors be affected? What type of further research should an investor conduct before deciding whether or not to invest in the bond market? What actions should current investors consider?

· While interest rates are low, leading to more lenders extending loans, is it necessary for the Fed to intervene and raise interest rates? Or would the market fix itself over time?

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