The broad high-quality bond market began 2013 on a sour note with a sell-off, posting its worst weekly performance since March 2012, as U.S. Treasury prices declined on news of a fiscal cliff resolution, LPL Financial's bond expert reported Tuesday.
While LPL doesn't believe the sell-off is the start of a sustained move higher in interest rates, bond yields are likely to remain range-bound, wrote LPL Market Strategist Anthony Valeri in a note, "Sour Start to New Year." Further, he said, LPL continues to favor higher-yielding segments of the bond market to avoid more interest rate-sensitive sectors.
"Optimism over recently passed legislation to narrowly, or temporarily, avert the fiscal cliff boosted economic growth expectations and concerns that the Fed may end bond purchases as soon as mid-2013 both weighed on high-quality bond prices," Valeri wrote.
He explained that the yield curve, which measures the differential between short-and long-term Treasuries, steepened notably as the bond market priced in prospects for better economic growth.
"Price declines and a 0.10% to 0.23% increase in intermediate- to long-term Treasury yields had investors asking whether the long-awaited bond bear market had finally arrived," Valeri said.
Bond analysts have been warning for the past year that interest rates are at their bottom, and bound to rise as soon as any signs of inflation in the U.S. economy set in. Bond prices and bond interest rates move in opposite directions. When rates rise, prices fall because a bond's value decreases.
