Posted by Don Martin on Tue, Apr 30, 2013 @ 03:52 PM
Target-date mutual funds have hidden risks
|
Target-date mutual funds have hidden risk and may not work as well as intended. The funds are preprogrammed to increase their bond allocation as the shareholder ages. For example if you plan on retiring in 2040 then you might be interested in buying a target-date fund with a 2040 date on it. The theory is that as a person becomes older they need to increase their allocation into bonds to reduce risk. For example, the idealistic goal for a 2040 fund is by 2040 the fund manager has sold off a significant portion of the risky stocks and put mostly (allegedly) low risk bonds in the portfolio. However because bond prices are very high then the hidden risk is that as the economy returns to normal interest rates will go up causing bond prices to go down. This will hurt the bond component of the portfolio, which may surprise investors since they may have assumed that bonds have less risk than stocks.
The best way to handle retirement nest egg risk is to manually pick investments based on the unique circumstances and facts. Currently there is unique new program of Quantitative Easing run by the Federal Reserve since 2009 which has created huge distortions in bond and stock prices. Thus the old clichés about investments don’t apply during these treacherous times, so one must use active management in selecting bond allocations.
The target-date fund might decide for a young person’s target-date fund that bonds should be in long term Treasuries but a long term bond with high duration is vulnerable to loss of value if interest rates increase. The correct way to handle the bond allocation would be to invest in low duration bonds. “Duration” means how long is the wait to get your money back, so a 10 year bond might have a seven year duration because the coupon payments mean that on average you got your money back in seven years even though the principal was paid back in ten years. Once the economy returns to normal then long term bonds could be bought at lower prices and the fund manager should then buy a balanced mix of long term and intermediate term bonds for the bond component of the portfolio, while maintaining some diversification in stocks.
The fallacy of the target-date fund is that people may mistakenly assume that they can buy it and forget about it. There is no such thing as a magic “one-decision” investment where you buy it and forget about it. Investments need to be monitored for new paradigm shifts that are similar to the disruption or creative destruction of new technology that destroys old technology firms.
I have written an article “QE’s surprising distortions of the bond market”.
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Apr 08, 2013 @ 02:09 PM
How QE will change investment paradigms
|
Bond prices may not crash as much as one would expect during the next cycle of rising interest rates. This is because a lot of bond holders have sold their bonds to the Fed and bought stocks or real estate. During rising interest rates the new rental real estate investors, who in previous decades before the Fed’s QE might have owned bonds, will find that on the one hand rising rates may discourage homeownership thus increasing demand for rentals, on the other hand the ability to sell real estate will be weakened by rising interest rates since it reduces affordability.
The new post-QE real estate investor, during a time of rising rates can’t sell off his real estate or get a cash-out refinance as easily as if his real estate assets were publicly traded bonds. When the real estate investor finds that his investment portfolio has fundamentally become more cumbersome and illiquid causing him to miss opportunities and encounter frustration with financing arrangements then this could result in a paradigm shift by investors.
Investors might seek to offset the illiquid nature of real estate by investing their stock holdings in lower risk, more liquid shares of large cap companies instead of illiquid small caps. They might slow down purchases of oil and gas shelters since those are illiquid.
So instead of private investors owning bonds and then dumping them in a panic during an era of rising rates, these bonds will be owned by an investor with the ultimate in poker-playing staying power, an investor who doesn’t need to sell and doesn’t care if a drop in asset prices creates a negative net worth – that investor is the Fed. The Fed as a bond investor will drag its feet on selling and thus a lesser than normal amount of supply will be available during bond market crashes. Ironically this repositioning of who owns what asset class may reduce the risk of bond prices crashing since it is reputed that the main holders of long term debt now are institutions that are required to hold Treasuries and other long term highly rated bonds. For example, this could be in the case of someone contractually required to offer Treasuries as collateral or a pension fund that is required to hold them, or a mortgage backed bond may be required to hold them as part of a strategy to diversify against or to offset early prepayment risk by refinancing homeowners. What asset class can boast that a large amount of the asset is held by a very stable, solvent, liquid entity that won’t sell the assets off in a panic? It is ironic how the Fed’s meddling has created a semi-permanent qualitative change that could result in interest rates being lower than they otherwise would be. This assumes the Fed ultimately decides it is too risky to sell off its bonds when the recovery has been finished and instead the Fed decides to wait until maturity to get its cash back.
Unemployment should not be interpreted as being as bad as it appears since there is a conflict of interest among some hardcore unemployed that incentivizes them to stay unemployed. Eventually a consensus will be reached that the natural rate of unemployment is much higher than the traditional 4% and the Fed will declare victory and send the troops home. This may happen in 2014, leading to interest rate increases and tears for over-leveraged real estate and stock market speculators.
The declining rate of labor force participation means that the unemployment rate will drop faster than expected, leading to a full employment economy sooner than expected, which would be an inflationary surprise that would hurt bonds, stocks, real estate.
I have written an article “When will the Fed increase rates?”
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Oct 29, 2012 @ 09:33 AM
When will the bond bubble burst?
|
Treasury interest rates have gone down over the past 31 years making Treasury prices very high. This price appreciation has caused people to call bond prices a bubble. People ask me when will the “bubble” burst? People are incensed that they can’t get a 5% yield in investment grade bonds, so they call it a bubble. Perhaps those individuals should ask themselves what was their opinion about bubbles during the tech bubble of 2000 when companies with no earnings were selling at absurd prices. Were they aware of the tech bubble and did they get out before it was too late?
The key determinant of long term Treasury bond prices is inflation. So what drives inflation? It is partly an increase in the money supply, most importantly it is an increase in money held by moderate income people and small businesses who need to spend money on the basic necessities. When they spend money that was provided by a loan that increases the amount of money that is chasing after goods and services, which creates inflation. If the world’s richest man gets a bank loan he will not spend the money on consumer goods but will instead use it for temporary financing of an asset purchase and then will sell the asset after it has appreciated. Then he will park the money in bonds until he can find a new investment. So an increase in the money supply that is held by wealthy people, institutions, and corporations is not money that will be used for consumption (instead it is hoarded under a mattress) and thus the increase is not inflationary.
To create inflation first a non-wealthy person needs income, a proper amount of liquidity and a positive net worth to qualify for a bank loan. Then he needs to apply for the loan and then spend the proceeds. During a recession middle class people’s income and net worth decline making it harder to qualify for a loan. Thus they have less cash to spend and so they buy less, which keeps prices stable.
One of the things that has made the U.S. different from most countries is that bank loans can only be approved for financially sound borrowers based on income. In many countries (except for northern Europe) the banks are pressured by the government to lend to unqualified businesses for good of society. This helps reduce the risk of inflation.
The U.S. has a history of depressionary crashes: we had them in 1830’s, 1870’s, 1890’s, 1907, 1929, and 2008. The lasted between 15 to 23 years. A popular myth was that since the Roosevelt era of the 1930’s that Keynesian economics would use deficit spending to create demand and we would never have another recession because all-knowing government economists would cool off overheated economies and warm up depressed economies. But during Greenspan’s era the Fed overstimulated and Congress overspent. Because people have too much debt it is not possible to issue more debt as per the Keynesian model. Thus the warm memories that most people have of never having lived through a 1930’s Great Depression and of having the government magically prevent a recession by using deficit spending are no longer valid. People have been brainwashed by the post 1930’s debt bubble to think we can never get into another 1930’s debt & deflation trap. But that is where we are.
For the bond “bubble” to burst first more good paying jobs need to be created so that people can qualify for and get loans. Then they can spend the borrowed money on consumption and create inflation. So to detect the end of the bond market rally one must understand labor markets. The bottom 90% of the population have jobs (or would like to have a job) with stagnant to declining real wages that are threatened by foreign competition. These people need to find a way to earn more money (in a stable, reliable way, not with contractor or temp work) so that they can qualify for and get an inflation causing bank loan.
Currently new jobs are being created at 75,000 a month which is 25,000 to 50,000 less a month than is needed to keep up with population increases. So unemployment is rising, making Treasury bonds go up in value.
If you have a short-sold Treasuries you should be aware that the bond "bubble" will burst in several years once the unemployment problem has been fixed. Considering the history of crashes that took 15 to 23 years to resolve and that it has been five years since the credit markets began to collapse in 2007, you may have to wait another 10 or more years from now for the bond prices to go down. If you are thinking of buying long term bonds be careful as the market could become increasingly volatile resulting in investors getting whipsawed during countercyclical panics against the bond market.
I wrote an article “Will T-Bond bubble burst?” and “Recession confirmed by Jobs report”.
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Oct 08, 2012 @ 08:55 AM
Sharpe ratio for bonds is risky because it can create misunderstandings
|
The asset classes with the best Sharpe ratios are bonds. The ones with the lowest risks often have the highest Sharpe ratios. A Sharpe ratio looks at the alpha (the excess return over the market’s return) divided by standard deviation to measure how much reward you got in proportion to the risk you have taken. Since investment grade short term bonds have the lowest risk then their alleged lack of risk magnifies their tiny gains and makes them the best investments on a risk adjusted basis, using the Sharpe ratio.
If the denominator is 0.1 and the alpha is 2% then the Sharpe ratio would be 20. Compare that to a denominator of 2 and an alpha of 2 and the ratio would be 1. So whenever interest rates are artificially low the market data is corrupted and needs to be adjusted.
The problem is that the denominator of the ratio is the short term Treasury yield which does not protect investors from the risk of inflation. Thus the Sharpe ratio is partially flawed, but well intentioned. A better way to use the Sharpe ratio would be to use a ten year average of the one year Treasury yield for the denominator. After all, if you intend to hold an investment for ten years then its value and your appraisal of it should not be influenced today’s temporary artificially low Fed teaser rate; rather use the short term risk-free rate for the average of the next ten years or if that is too hard to estimate then at least use the past ten years.
The other risk of the Sharpe ratio is that investments that did well in the past because they were too low priced three years ago may have now completed their upcycle and now will need to go down in price or simply stop appreciating. The Sharpe ratio does not cover the risk of inflation nor does it cover the risk of "reinvestment risk" when one is trying to rollover recently matured short term bonds during a period of declining rates. However, the poor performance of long term bonds during a period of rising inflation would show up in the results, so the Sharpe ratio could include the risk of inflation, except that it uses historical data and trends are frequently changing.
There is some basis for respecting the Sharpe ratio’s judgment that short term bonds are best (despite the lack of an inflation warning system in a Sharpe ratio) because during the inflationary 1970’s one of the best investments were short term Treasuries. As inflation increased when investors rolled over their short term Treasury Notes into a new short term Note with a new higher yield they still made a greater total return than other asset classes.
A simpler way of adjusting for the problem with Sharpe ratios during a period of negative real rates is to refuse to use it for bonds with an extremely low standard deviation. For example an analyst could have a rule that a minimum standard deviation of 1.0 is required to make a Sharpe ratio meaningful; this might require that short term high quality bond funds with a maturity of under a year would have to be analyzed with something besides a Sharpe ratio.
I wrote an article “Four investment tools you must know”.
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Sep 17, 2012 @ 02:33 PM
Fed’s QE∞ Hurts and Helps Bond Prices
|
The Fed’s QEi or QE∞ announced September 13 won’t work and is act of desperation by Bernanke. The expected 0.3% cut in mortgage rates from this action will reduce the average American’s housing costs (including tax and insurance, etc.) by 1.4% which will reduce their overall living expenses by about 0.5%, assuming a family might spend a third of their income on total housing costs. Assuming the average existing home is worth about $188,000 and has an 80% LTV mortgage the savings will be $23 monthly but with a smaller tax deduction it could be $14 a month, which is not enough to bother paying for closing costs. (A no-cost loan would have higher rates).
The damage to the economy will be in the form of retirees who suffer a cut in their income, insurance companies and banks who become dysfunctional with rates that are too low to allow a profit margin and the great risk that investors will be forced to gamble recklessly with high risk assets junk bonds, etc. to make up for a lack of interest income. Today the Wall Street Journal ran an article claiming new Master Limited Partnerships with yields up to 19% are being created. Traditional profit margins are 6% of sales and are now 9%. If a company is free of corporate income tax then these margins could possibly hit 11% if earned by an MLP or a REIT which are “flow-through” entities for tax purposes. However one should assume profit margins will revert to 6% of sales. If the share price is 2x sales then a share might have a long term earnings of 3% of its price, plus more for the untaxed profit of an MLP, so perhaps an MLP could payout 4% of its price, not 11% or 19%.
Wow a gigantic yield from MLP's-except it's too risky
One could argue hypothetically speaking that the Fed has ruined the bond market by making investment grade bond yields negative or zero in “real” terms for intermediate term and short term debt, especially if taxes are calculated. For example, the Barclay’s Aggregate intermediate term index “AGG” yields 1.78%. The two year Treasury yields 0.25%.
This presents an interesting phenomenon: when the coming Fiscal Cliff occurs at year end investors may sell off stocks and buy bonds, making the bond prices go up higher and yields go lower. Yet the Fed’s actions may create inflation so in theory investors will eventually sell off bonds, making the bond price go down and making interest rates go higher. The resulting extreme volatility in the bond market will be very difficult to understand and will make it too risky to own bonds.
Investors should not panic in attempting to get out of bonds and into unacceptable risky stocks and real estate just to get a dividend of 2% to 5%. Remain calm and don’t rush to buy a repalcement from the proceeds of your bond sales. But do consider getting out of domestic investment grade long term and intermediate term debt. Special considerations for assets such as distressed debt workouts or Emerging Markets below investment grade credit quality debt may offset some of the risk of a return of inflation and higher interest rates.
I have written that peacetime inflation only hit once in the U.S. and that was the 1970’s. However the modern welfare state with its huge tax burden has only been around for about 70 years. In the past 70 years we had WWII inflation and 1970's inflation. That is two out of seven decades, which is roughly 30% of the time. During the 1990’s there were some disinflationary imports from China and in the last five years we had domestic disinflation from the collapse of the housing bubble. The concern is that if we are in a post WWII trend towards an ever-growing welfare state that needs to monetize its debt then the disinflationary era of 1990-2012 could be an outlier and the dominant trend could be a Fed that promotes inflationary activity to help the Federal government finance its growing deficit. This won’t help debtors inflate away their debts because 70% of debts and contracts are indexed to inflation or bond benchmarks that are sensitive to inflation.
Ironically the best asset class during the 1970’s was cash or near-cash (short term bonds) because short term interest rates kept up with inflation. Stocks did poorly because inflation hurt consumers. They also did poorly because high inflation makes discount rates, used by analysts to value a company, very high and high discount rates ruin the value of future cash flows, so companies had share price valuations damaged by inflation.
I wrote an article “Fed’s QEi announcement” and “QE2 won’t work and will damage the Fed” and
Investors should seek independent financial advice.
Posted by Don Martin on Tue, Jun 26, 2012 @ 04:25 PM
What is the effect on "bond mutual funds" of stock crash?
|
When stocks crash then interest rates go down, which makes bonds go up in value. When stocks crash business conditions are usually bad so investors flee into the relative safety of the bond market, making bonds go up in value. A stock crash may be a deflationary event which drives down interest rates, thus making bonds, with their fixed yield, more attractive, so bond prices may go up if their credit quality is very high.
A basic concept in investing is to keep an allocation of funds in bonds so that when stocks crash you can sell the bonds at a high price and use the cash to buy stocks at a low price.
The effect on bond mutual funds during a stock crash is that some individual bonds may be hard to sell due to their illiquidity, however, the shares of an open end mutual fund that invests in bonds can be redeemed at Net Asset Value from the fund company. Individual bonds suffer from a Broker-Dealer’s Markup-Markdown fees which can be roughly 1% for investors selling less than $100,000 of a bond at a time. It can be even greater percentage for tiny sales. This makes it much easier and less costly to liquidate a bond position by redeeming the shares of a mutual fund when stocks crash.
The concept that bonds go up during a stock crash only applies if the credit quality of the bonds are investment grade, preferably AAA quality. If the bonds are near the lower end of the investment grade rating they may go down in value due to fear that a recession could hurt the issuing company. There are two conflicting forces that affect bond prices during a stock crash: one is the desire for a safe haven from stocks which helps bonds go up; the other force is fear that a low quality bond could go into default during a severe recession and thus its value could go down.
Bonds can be a store of wealth during a deflationary stock crash
If your goal is to buy bonds as a refugee from stock crashes then you need to get investment grade bonds that have an AA or AAA rating. If you hold A or BBB quality bonds they could go down in value and then gradually recover after the panic subsides. If you hold AA quality they can go down in value during a severe panic. When Lehman went bankrupt that cause a panic selloff of quality bonds with AA ratings making them briefly go down by a small amount. These bonds recovered in a few months. During a severe crash leveraged investors can’t meet margin calls and are forced to sell good assets that they don’t want to sell so bond prices on investment grade bonds may drop even though macroeconomic conditions imply they should go up.
I wrote an article “Protect 401k from stock crash with investment grade bonds” and “Preventing stock crash damage to your 401k”.
Investors should seek independent financial advice.
Posted by Don Martin on Wed, Jun 20, 2012 @ 03:56 PM
How do I tell if my 401k is offering an investment grade bond?
|
Examine your 401k holdings to see if they are investment grade bonds. The way to do this is to first find the five digit ticker symbol for the mutual fund choices for bond mutual funds offered in the 401k. Then Google the individual bond mutual funds and find out the name of the mutual fund family and go to the fund family’s website, then go to the web page for that particular bond mutual fund. The mutual fund company’s website should say what percentage of the fund’s holdings are in a certain credit grade and possibly give a weighted average of the total holdings. Unfortunately Pimco (a large bond mutual fund family) stopped offering this information in writing although they have given it me orally. It makes me wonder: why are they afraid to put it in writing?
Understanding letter grades for credit quality
For S&P or Fitch: grades AAA to BBB- are investment grade. Grades BB down to D are below investment grade. For Moody’s they use Aaa to Baa3 for investment grade and Ba1 to C for below investment grade. The rating agencies use “NR” for not rated. This could be a problem in cases where a large percentage of bonds in a mutual fund are “NR” then an investor doesn’t know what he is getting. See Wikipedia. Large, well established companies tend to get rated and smaller ones may not, so just because they are not rated doesn’t mean they are bad, but I would feel better buying funds that have a minimal percentage of NR rated bonds. However, the fund companies claim they can evaluate the credit risk of NR bonds.
Open the secrets to bond investing
The problem with grades is that they are based on the past; there is the risk that new circumstances could erode a company’s credit quality. The mutual fund company attempts to look out for the risk of credit quality downgrades before they happen but there is no guarantee that they will outsmart the market.
Other sources of bond ratings are Morningstar or other stock reporting services may publish a credit rating for a company, but this is not the same as a bond because each corporate bond has unique terms such as collateral or covenants to maintain certain financial standards. Large companies may have issued many different bonds under different covenants that could make the credit quality different from other bonds issued by the same company, so you can’t simply use a company-wide credit rating to assess the credit quality of a company’s bond.
The danger of blended credit quality in bond mutual funds
Bond mutual funds need to boost their yield so as to attract investors. They do this by buying junk bonds and diluting the portfolio with a mixture of 19.9% junk (below investment grade) bonds and 80.1% investment grade bonds. Then they offer the mutual fund as an investment grade bond fund. If you insist on buying mutual funds without using an independent financial advisor then you risk being fooled by the mutual funds. One strategy is to carefully read the fund company literature to see if they offer a commitment to very minimal holding of junk bonds. However, in today’s market it may be necessary for investors to take some chances with a small dose of junk bonds inside of a mutual fund that is primarily holding investment grade bonds. The way I evaluate that risk is to examine the corporate culture and essays of the mutual fund and see if they care about credit quality in an overall holistic sense or are they simply ruthless mercenaries trying to be a yield hog who seeks the highest yield regardless of risk.
There is the risk of a new recession later this year and that might result in lots of bankruptcies and short payoffs which would reduce the value of junk bonds. Investors should resist the siren songs of high yield junk bonds that could damage their portfolio. Instead investors should accept the reality of low yielding investment grade bonds with a goal of preserving capital until a huge stock market crash allows investors to buy stocks at good, low, fair prices, at which time one can bid farewell to the bond market.
I wrote an article “Six things you must know about 401k risks” and “Preventing stock crash damage to your 401k”.
Investors should seek independent financial advice.
Posted by Don Martin on Mon, Dec 19, 2011 @ 03:47 PM
How will the death of Kim Jong Il affect the markets?
|
The death of North Korean dictator Kim Jong Il yesterday may result in political instability and more market volatility. If North Korea collapses it will be very expensive for South Korea to solve the North’s problems. This could result in a recession in South Korea which could spread to the rest of Asia. Over the long run it will make the Asian region more productive and reduce inflation as North Korean workers become part of the global work force.
The risk of political instability helped drive more investors into U.S. Treasuries today with the Treasury long bond ETF “TLT” going up 1.27% to close at 123.87, its highest closing price ever. However, I think this was due to fear about the continuing crisis in the Eurozone. Remember the collapse of the Soviet Union and east Germany? The changes in China? The collapse of the South Vietnam government? These changes may inspire fear but in terms of how they affected the world economy it was not that significant except that it increased the supply of low cost labor leading to a deflationary boom. So if 20,000,000 North Koreans join the rest of the world it won’t change the world economy that much.
The real news story is that the bond market is getting worried about a Eurozone collapse and continues weakness in the U.S. economy, thus making Treasuries go close to new lows.
I wrote an article “Don’t worry about the stock market”.
Investors should seek independent financial advice. 
Posted by Don Martin on Fri, Nov 04, 2011 @ 05:33 PM
Understanding unemployment
|
Today’s monthly non-farm payroll report showed a jobs increase of 80,000, which was close to my estimate of 65,000. The household employment on a payroll and population adjusted basis fell by 73,000. Unemployment fell by 0.1% from 9.1% to 9.0%. To add jobs faster than population growth requires at least 125,000 jobs each month and to get out of recession and back to normal requires 200,000 jobs monthly for several years.
Analyzing unemployment is like looking at interest rates and then adjusting for inflation to find the “real” rate of interest. If you earn 3% and lose 2% to inflation the real rate is 1%. The analogy is that if 80,000 news jobs were created but the population is growing by 125,000 a month then the difference is negative 45,000 jobs. So the real change in unemployment rate should be 45,000, but the government has calculated it at a 73,000 net loss a payroll and population adjusted basis.
The jobs increase is small change - not enough to help
How does this affect investors?
|
What this means for investors seeking independent financial advice is that the bond market will continue to have low rates because high unemployment usually correlates with low inflation and low interest rates. Today the 30 year Treasury ETF "TLT" closed up in price by $0.14, a 0.12% gain and the ten year Treasury rate went down 0.016%. So the marketplace is treating the monthly payroll report as a sign of negative "real" job growth.
I have written an article “Friday payroll news to provoke QE3” however today’s rate is probably not a low enough rate to provoke QE3 and “Unemployment problem unsolved”.
Investors should seek independent financial advice. 
Posted by Don Martin on Fri, Nov 04, 2011 @ 01:05 AM
Non-farm payroll report to be released tomorrow to be 65,000 net new jobs. This should be anticipated by the market and thus prices will be steady when the market opens Friday morning. The economy needs 200,000 net new jobs each month for several years to get back to normal and there is no sign of that many jobs being created.
My forecast for Treasury bonds is that the 10 year bond will retouch its lows and possibly go as low as 1.50% sometime next year when a new recession begins. The end of stimulus on 12-31-11 is only 57 days away. The Eurozone’s smoldering financial volcano is looking more dangerous every week. That alone is enough to drag the U.S. into recession.
When we go into recession the Fed will have an excuse to do QE3 and may try to buy mortgage bonds to cut rates, but it won’t help those with bad credit, or who have negative equity and a non-Fannie or non-Freddie loan. It won’t help most owners of non-owner occupied houses because the underwriting rules are so much stricter a lot of landlords can’t qualify for a loan even if they have kept their job. The loan problem is that those who need a loan don’t qualify and it is too risky for the government to loan money to an unqualified person or business. Just look at the $500,000,000 loss when the government guaranteed Solyndra’s loan and they went bankrupt.
If the Fed buys mortgage bonds it will trigger a wave of refinancing that will lower the value of bond portfolios as the marketplace anticipates prepayment of old high rate loans that will be replaced with new lower yielding loans. So the price of mortgage backed securities can go down (which makes their yield go up) if the Fed intervenes to buy them, thus producing the opposite of what the Fed intended. If rates drop for mortgages the bond market anticipates their value will drop due to prepayment risk, even though finance textbooks say if rates drop then bond prices will rise. A similar counter intuitive thing happened when QE2 caused commodity inflation in Emerging Markets which filtered back to the U.S., thus causing consumers to buy less things because of the higher costs. Interest rates actually went up during QE2 due to anticipation of inflation and economic recovery, thus the bond market behaved counter intuitively.
This phenomenon is the mirror image opposite of the “crowding in’ phenomenon where panicky investors crowd into the lifeboat of Treasuries and pay very high prices for the safety of Treasuries even though the U.S. government’s solvency has worsened due to the crisis.
Investors should seek independent financial advice.