As we approach the Christmas holidays, it’s only natural for us to begin to anticipate Santa coming down the chimney with his bag of joy and presents. But this year there’s more to watch out for: Santa might be warming up his sleigh, and investors may need to take a closer look at the Federal Reserve and the bond market.
Throughout 2020, the Federal Reserve has taken unprecedented steps to sustain the U.S. economy. In addition to its monetary stimulus measures, the central bank has maintained a near-zero interest rates, which honestly makes it a little difficult to invest in bonds and for banks to make money.
At the same time, governments around the world have increased spending to support businesses and individuals affected by the pandemic. With low-interest rates, governments have been able to borrow funds at a discounted rate, creating a budget deficit in the process.
This all means that bond investors have been drawn into a game of ‘wait and see.’ They must weigh how long the Federal Reserve’s policy will last – and if it will cause the bond markets to become volatile – against the potential rewards that may come with investing in bonds. It’s no surprise, then, that many investors are on the fence when it comes to investing in government bonds.
But while many investors are turning to other safe-havens, such as commodities and gold, others may find an opportunity in the bond market. After all, the Federal Reserve isn’t likely to raise interest rates anytime soon, and that means the low-interest rate environment will remain in place for quite some time. That could mean that bond investors will be able to reap the benefits of the strong returns even when interest rates start to rise.
So, as Santa takes to the skies, investors should watch the Federal Reserve and bond market closely. With the right strategy in place, watching these two as Christmas approaches may be the ideal way to secure financial gains. Who knows? You might even wake up on Christmas morning to your very own present.
