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Economic and Market Update
Economic & Market Update, June 2014
Why Bond Prices are Rising
By Richard Morey
This month we are going to focus on the bond market. This year the bond market has shocked Wall Street. As the year began, I recall a Bloomberg survey of 70 market analysts showed over 98% of them were certain bonds prices would continue to fall in 2014. Shortly thereafter a 2nd survey showed the sole dissenter had switched camps, leaving all the TV analysts sure this would be a bad year for bonds. The major Wall Street banks agreed, with Goldman Sachs and Bank of America telling their clients to sell all their government bonds (Treasuries), putting the proceeds into stocks.
The reason so many were so negative on bonds was their certainty 2014 would be the year in which the U.S. economy takes off from its doldrums, finally achieving “escape velocity.” At the beginning of the year nearly everyone thought the U.S. economy would grow at over 3% annualized. Due to the cold winter most thought growth in the first quarter might go down to around 2% before shooting up to 4% the rest of the year. If the U.S. economy were to achieve above-average growth, the Federal Reserve Board would have to raise interest rates to slow it down to avoid excessive inflation. This would hurt bond prices, so Wall Street said sell bonds.Read more