For the last 40 years, interest rates have gone pretty much one way: down. In the last 18 months, however, rates have crept up, challenging long-held beliefs about the bond market. Contrary to popular belief, rising interest rates have exploded three common myths about the bond market. The first myth is that bond prices always rise when interest rates fall. However, recent events have shown that bond prices can fall even when interest rates are low. The second myth is that longer-term bonds are always riskier than shorter-term bonds. However, the recent rise in interest rates has affected shorter-term bonds more than longer-term bonds. The third myth is that rising interest rates are always bad for bond investors. In fact, rising interest rates can provide opportunities for investors to earn higher yields on new bond purchases. Overall, the recent rise in interest rates has exposed these three common myths about the bond market. Contrarian investors should be aware of these new realities and adjust their investment strategies accordingly.
The 'Forever Low' brigade, who believed that interest rates would remain perpetually low, dismissed concerns about high government debt and the need for fiscal discipline. However, interest rates are now rising, and the belief in forever low rates is being challenged. The author argues that relying on low rates as a justification for increasing debt is unwise, as it leads to larger interest payments and less spending on government programs. The author also highlights the danger of inflation and the potential for a vicious cycle of rising interest payments and more borrowing. The Forever Low believers were correct in the short term, but their mistake was underestimating the cost of additional debt. [7bba64ae]