How to Endure the Big Decline in Bonds

Look at it this way. The Fed has already told us it expects that within the next year or two, the fed funds rate will exceed 2.25 percent. So the yield on two-year Treasurys has roughly tripled since Dec. 31, rising to about 2.3 percent from 0.73 percent. Because prices move in the opposite direction from interest rates, the value of Treasurys has plummeted.

I keep hearing about “inversions” in the bond market. What’s that all about?

While the Fed has intervened extensively in the entire bond market, it has less influence over longer-term bonds — those for, say, five or 10 or 30 years. Their yields haven’t risen as rapidly as those for shorter-term securities. In fact, some shorter-term rates have already exceeded those for longer-term bonds. When that happens, as the jargon goes, there is a “yield curve inversion.”

Inversions suggest that traders doubt that the Fed will be able to keep increasing interest rates because the economic impact will be too severe.

Yield curve inversions sometimes, but not always, predict recessions. The signals so far are fuzzy, said Richard Bernstein, the former chief investment strategist for Merrill Lynch, who now runs his own firm, Richard Bernstein Advisors.

“The Fed has many options it can choose before we will be facing a recession,” he said, adding that he doesn’t expect a recession soon but does believe that inflation will remain fairly high. Mr. Bernstein, therefore, suggests that, in addition to bonds, investors should be holding assets that “tend to prosper in high-inflation environments, like commodities, real estate or certain kinds of stocks, like in the energy, materials or defense sectors.”

I own Treasury bonds directly, not through mutual funds or E.T.F.s. Have I lost money?

No, unless you sell the bonds, you won’t lose a cent.

The U.S. government stands behind all Treasurys. In crises, investors from all over the planet buy them for that reason.