Interest Rate Risk

Interest Rate Risk: When interest rates rise, the market value of the debt securities tends to drop.  This makes it difficult for the bond investor to sell a T-bond without losing on the investment.

A long time ago, in a galaxy far, far away, it was explained to me that the bond market was gargantuan compared to the other markets like equities.  People far and wide buy and sell the debt paper issued by their own government and the governments of other countries.  U.S. bonds are the King Kong of the bond jungle.  Gamblers line up to buy securities issued by foreign governments with the hope of trading them off to other gamblers for a profit.  The amount of money that trades hands is staggering.  The profits can be huge.  If you bought a high yielding 30 year security issued by a debtor nation deemed to be AAA rated and interest rates (market wide) dropped, you could sell that security to someone else for a large profit.  If you bought at the bottom and interest rates rose, well....not so much.

The last time the 2 year yield rose to a higher level than the 10 year yield was also a long time ago.  January 31, 2006.  That inversion lasted until March 21, 2007.  That inversion lasted a mere 13 months.  The current inversion is still in place but the gap is becoming more narrow by the day.  Up is down and down is up.  Central Bank intervention (buying long term bonds at nosebleed prices thus lowering the yield on the security) in what should be a free market (the market for the time value of money) has consequences.  Powell and company have a choice to make.  Either let markets do their thing and let losers lose and winners win.  Or, intervene again with Q.E. and rate fixing and completely destroy the value of the dollar and force the middle class / poor to take a wheel barrow of cash to Wal-Mart each time that they want to go buy groceries or fill up the Durango with petrol.