As if it wasn’t bad enough for the millions of Americans scraping by on paltry interest payments, now they face another threat: the loss of principal on their bonds and other fixed-income assets.
The month of May, and this first week of June, were terrible for many fixed-income investors who have spent the last few years reaching for higher yields.
The sell-off in fixed income began slowly on May 10, an otherwise uneventful day with no obvious catalyst for any change in sentiment. It picked up steam when Fed sources didn’t step forward to calm markets. Then, in comments to Congress on May 22, Mr. Bernanke said, “We could in the next few meetings take a step down in our pace of purchases.”
That set off alarm bells, in contrast with his prepared text, which gave no suggestion that the Fed’s policy would change so soon. And then, the minutes of the Fed’s May meeting suggested that some Fed governors were prepared to start tapering off bond purchases as soon as the Fed’s next meeting, which will be June 18 and 19. Near-panic selling in some markets ensued.
“When you get a fundamental shift in interest rates, which doesn’t happen very often, the initial move is always pretty dramatic,” Mr. Cohn said. “It’s a move from a lower rate world to a higher rate world, and people try to get ahead of it.”