Ian King Explains How The Bond Market Is Challenging The Stock Market

ian king bond and stock markets

A recent Banyan Hill article by Ian King explained the increasing popularity of bonds. According to Ian, the bond market is challenging the stock market. With a few exceptions, the stock market has been the leading performer between the two for the past decade. During that time, the S&P rose by 29 percent. Ian noted in his article that the Federal Reserve recently decided to hold its rates. However, an upcoming June meeting will likely conclude with a considerable basis point hike. The overnight lending rates between banks are called fed funds, and they are staying steady at 1.75 percent. These rates will likely climb by .25 percent by the end of the upcoming meeting in June.

Ian noted that the Fed has been consistent with its increase patterns in the past. With the recent increases, more investors are turning their attention to the bond market. A three-month bill with no risks may yield two percent, and it may give investors who want to avoid the stock market’s volatility an attractive alternative. As someone who has experience in mortgage bond trading, Ian King offers valuable insights to back his advice. Ian also spent time working at Citigroup with credit derivatives. Additionally, he was a head trader for a prestigious hedge fund.

The Rise Of Bonds

As Ian pointed out, yields moved up during the past year. At a yield rate of 2.74 percent, the U.S. two-year note is 118 points higher than it was one year ago. With an increase of 92 basis points over the last year, the five-year note is now at 2.76 percent. The 10-year note increased more than 62 points last year. It has an annual yield rate of 2.95 now. However, the yield curve rate plateaus after 10 years. With a 30-year bond, the yield is a modest 3.12 percent at full maturity. That is only 17 basis points higher than a 10-year bond’s yield. Since last year, the long bond has only grown by 12 basis points. Stocks have not faced much competition since 2009. However, Ian and other successful investing experts are now telling people that trends are about to change.

The TINA Effect

TINA is an acronym for “there is no alternative.” It is often used by investors and advisers to reference a lack of competition for stocks. According to Ian King, many investors think of the TINA acronym when the stock market pulls back. They do it to remind themselves that they cannot get a better return somewhere else, which helps them remember to keep their current stocks. For example, investors may be hesitant to shift toward stocks late in a bull market due to worries of a reversal. However, they may hold their stocks if other assets are unattractive and if bonds offer low yields. When masses of investors think this way, the TINA effect happens and causes a gradual rise.

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Quantitative Easing Forced Change

Ian referenced the multiple rounds of quantitative easing that took place in 2008. They were organized by the Fed. Quantitative easing led to longer-dated bonds, which expanded the money base. The idea was to give banks an influx of money since they needed liquidity at that time. Also, the Fed wanted to turn bonds into bad investments. By doing that, it forced investors to accept higher risks. The Fed’s hope was to create a wealth effect by forcefully boosting the stock market and promoting consumer spending. The U.S. Fed was not alone in its quantitative easing efforts. The Bank of Japan and the European Central Bank both took similar actions. As yields around the world fell, investors everywhere had to take more risks. When the trend of aggressive purchasing grew, bond prices increased while yields fell.

Current Options For Investors

The 10-year yield for a U.S. bond fell to 1.46 percent in 2016. At the same time, the German bond dropped below zero. Investors were forced to take on high-yield bonds and corporate bonds instead of safer options. As they moved on to riskier choices, the yields for dividends fell. Since 2010, the S&P dividend yield has decreased from 2.75 percent to 1.92 percent. Since the three-month yield is now above the dividend yield for the S&P 500, the rate rise has major significance. Recently, ETFs and equity mutual funds have had higher outflows. Also, stock funds have lost $72 billion since February 2018.

Several experts are advising long-term investors against shifting too heavily toward bonds despite the state of the stock market. Some are recommending stocks that pay dividends as optimal long-term investments. While some people are considering cashing out now to use their money for home improvements or for other purposes, experts are advising against cashing out. When people cash out their investments, they have less money to use as a foundation for future growth. The current state of the stock market and the emergence of bond popularity may cause some people to make hasty decisions without proper direction. As a calm and knowledgeable investor who considers past and current trends along with analysis for future trends, Ian King advises investors to work under the direction of a trusted expert.

In addition to his experience with bonds and hedge fund management, Ian King is a skilled cryptocurrency investing expert. He developed a special multimedia program about cryptocurrency investing for Investopedia. Ian holds a bachelor’s degree in psychology. In 2017, he joined the editorial staff at Banyan Hill Publishing. He is a senior analyst for Banyan Hill and is the company’s main investing authority for cryptocurrencies. Ian King is also the author of the Crypto Profit Trader newsletter, and he often shares advice and tips about other investing topics as well.

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