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Investors Rough Bond Market ahead?

Written by Jim Pearce

A few days ago, a co-worker dropped a letter on my desk he received from the financial services division of luxury automobile manufacturer. Since he owns one of their higher priced models, they figured he might be willing to allow them to use his cash to lend to new car buyers. They’re willing to pay him 1.7% on his money. That is much higher than what he can get on his savings account at the bank.

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Interest rates are on the rise. Companies that need a lot of cash to lend to customers buying on credit are starting to feel the pinch. Their profit margins are largely a function of the cost of capital versus the price at which they can lend it out to new car buyers. That means every fraction of a percentage point is worth a lot of money to them.

An unsolicited offer like this is one more sign that inflation is on the rise. It should also serve as a warning to bond investors that rougher days lay ahead. For most of the past 35 years, we have only known declining interest rates. Now that they are rising, income investors need to think differently about the risk in their portfolios.

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