Rate Increase Creates Risk for Both Bond and Equity Buyers

Long-term U.S. bonds continue to be in demand, even in the face of a potential increase in interest rates. Duration, which measures a bond's price sensitivity to interest rate changes, is higher for longer-term bonds, suggesting that buyers could be in for a big surprise if the Federal Reserve proceeds with the rate increase. See article here, WSJ. At the same time, equity markets fell with the renewed expectation of a rate increase. See article here, WSJ.

Yield Curve Flattens

The spread between short- and long-term government bonds has decreased, creating a so-called flatter yield curve. This move has been driven by two factors. First, there is an increased belief that the Federal Reserve will raise interest rates, which has driven up the yields on shorter-term bonds. Second, foreign buyers have been acquiring longer-term U.S. bonds as they have a higher yield than their home country offers. This has pushed down the yield of longer term bonds, creating the flatter yield curve. See article here, WSJ.