Could the current strong demand for bond mutual funds fade?
There are already signs that the cyclical demand may be slowing and the large positive returns in bond mutual funds may be nearing the end stage of this cycle. It’s difficult to say when the cycle will end. The Federal Reserve has already bumped up the discount rate—the interest rate it charges on loans to commercial banks and other depository institutions—and will begin to increase the federal funds rate at some point, which will mean lower returns in bond mutual funds if intermediate- and long-term interest rates follow suit. Indeed, bond returns could even become negative as they did during 1994–1995 when the Federal Reserve ratcheted up short-term interest rates and intermediate- and long-term interest rates also increased.
Related Questions
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