The recent government shutdown may go down as the longest in U.S. history. Fears do exist the shutdown will dramatically impact the economy negatively. The New York Times doesn’t disagree with this assessment. “The Paper of Record” does suggest the public shouldn’t take its eyes off of other potentially harmful factors. The bond market, in particular, could be the source of extended economic pain.
The paper points out trouble may soon emerge out of the private bond market. For years, interest rates were kept low. Increased interest rates represent one reason the stock market experienced a recent decline. The Federal Reserve changed directions after years of low rates. Regardless of the decision’s necessity, investors weren’t pleased over the impact. Perhaps they should worry about long-term problems associated with lowered interest rates. The low rates contributed to the increased business debt. Corporate bonds did see their prices increase as a result. Investors in those bonds won’t be disappointed about seeing returns. However, if the incurred debt leads to a default on the obligations, investors won’t walk away with profits.
Bonds, in essence, are loans. Corporations selling bonds are giving out loans to investors. Failure to pay on the bonds means defaults on the loans. A failure to pay could indicate low liquidity, a bad sign for any business. When billions of dollars of bond loans could end up in default, the bad news extends to a nation’s economy.
Experienced investors should know better than to assume unstable or unsustainable conditions won’t lead to extended gains. Unfortunately, strong returns on investments lead to clouded judgment. A segment of investors hope the positive conditions remain in place forever. They could face financial pain as a result. Worse, they may bring others down with them due to their negative effect on the economy.
Past lessons aren’t always learned. Investors embracing great risks sometimes ignore warnings. The New York Times wishes to sound the alarm. How many will heed the warning though?