- Summary: Over the last few years, investors have bid up the price of long-duration fixed-income assets, including long term bonds, timberland and toll roads. Last year France, Poland and the UK issued 50 year bonds. Some of the demand came from pension funds' need to match the duration of their assets with that of their liabilities. But the impact was to bid down long rates on these assets to little more than long term US Treasury rates. Now, rising short term interest rates could lead to declines in long term asset prices as long term rates rise or investors redeploy cash into higher interest bearing short term bonds.
- Comment on related stocks/ETFs: This argument can be applied equally to stocks, as stocks are nothing more than ownership of a long term stream of future earnings. For that reason, the famed "Fed Model" compares US stock valuations (via the earnings yeild, or the inverse of the P/E ratio) to current interest rates. If the price of long-term debt will fall, as this article implies, so too should stock prices.
Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):