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As an investing community we tend to focus mostly on stocks and the stock market. Apple this. Amazon that. Where did the Dow Jones close today? But currently, what may be more interesting is the bond market. The bond market and its corresponding interest rates have much to say about what is going on in the economy and what we could be headed for.

Let’s start with the basics. The US bond market is made up of debt issued by corporations, governments (federal and local), and government agencies. As of the end of last year, the total outstanding bond market debt in the US was just over $40 trillion*. Compare this to the market capitalization of the Russell 3000 – which covers 98.5% of the country’s market capitalization – at about $30 trillion^. As with stocks, bond prices/yields are set by the market through supply and demand. However, there are many components that go into the two sides of that equation. That’s what makes it somewhat complicated.

Currently, the benchmark ten year US Treasury Note is yielding 2.96% (as of 4.20.2018). This is 0.56% higher than it was at the end of last year. In interest rate terms, that’s quite a change. There are many reasons for the increase, including the anticipation of higher GDP and wage inflation. Both of these factors should be good for the economy and cause investors to demand higher rates for longer term Treasuries. On the supply side, the Federal Reserve began to unwind its quantitative…

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