To continue the discussion on bond investing and bond price risk, Treasurys rose today after the government reported that the U.S. economy expanded 1.5%, as measured by Gross Domestic Product (GDP), in the second quarter. Why is this a concern for bond mutual fund investors? The biggest threat to bond prices is a growing economy.
There is no question that the economy is weak. However there is no certainty about the direction of the US economy in the short-term; there is roughly equal odds of economic growth as there is for economic recession. When markets are presented evidence of a growing economy, yields on Treasury Securities (T-bills, T-notes, T-bonds) will normally rise and prices move in the opposite direction (down). This will push bond mutual fund prices, measured by Net Asset Value (NAV), downward.
This is one reason why bond mutual fund investors should keep an eye on economic reports and their impact on Treasury yields (and prices). I never recommend market timing, especially for beginners, but I will continue this discussion on bond price risk because bond mutual fund investors have enjoyed generally favorable conditions for the past 30 years and this time is likely coming to an end in the near future. This end will be marked by a growing economy, whenever that eventuality occurs.