What the Dow's Plunge Means for Bonds

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

You can blame today's big drop in the Dow Jones Industrials (INDEX: ^DJI  ) -- at 160 points and counting as of 1:45 p.m. EDT -- on several things, ranging from European fears and the Federal Reserve's announcement yesterday to simply a tired market that's soared so far this year. But an equally important question for many investors is what impact the Dow's plunge will have on the bond market.

In recent months, the Dow's rise has come at the expense of bonds. The 10-year Treasury yield (INDEX: ^TNX  ) has risen from 1.87% at the beginning of 2012 to as high as 2.4% last month, as improving economic conditions seemed to hint at a coming end to the Fed's low rate policies. The jump in the 30-year Treasury yield (INDEX: ^TYX  ) was even more extreme, with rates rising from 2.89% to 3.49% at their highs last month. Yet throughout this period, short-term rates have hardly budged, with three-month Treasury bills staying under 0.1%.

But over the past two days, we've seen the bond market react differently to the Dow's drops. Yesterday, bond yields rose even as stocks fell, with expectations that the Fed would let rates rise, driving the stock market's decline. Today, though, bond yields are moving back down, presumably as investors look for safe havens to protect themselves from a stock market correction.

Meanwhile, European problems could have a direct impact on bonds. It was a poor auction of government debt from Spain that helped reawaken fears of a sovereign-debt crisis, and those problems could well persist for quite a while. Already, both Banco Santander (NYSE: STD  ) and National Bank of Greece (NYSE: NBG  ) are close to revisiting their recent lows as a result of those fears, and even French banks are coming under pressure. So far, U.S. bonds have been largely unaffected, but a full-blown financial crisis would likely push investors into the perceived safety of Treasuries even as European bonds lose value.

What's next for bonds depends a lot on how the economy plays out. A stronger recovery should boost rates. But any unexpected weakness could bring rates back down, making money for bond investors.

Make a stronger bond
Increasingly, bond investors have looked to dividend stocks for greater income. Get a sample of some strong dividend ideas in the Fool's special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." I invite you to grab a free copy to discover everything you need to know about these nine generous dividend payers.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. You can follow him on Twitter here. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1855462, ~/Articles/ArticleHandler.aspx, 10/27/2016 10:43:01 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 hour ago Sponsored by:
DOW 18,169.68 -29.65 -0.16%
S&P 500 2,133.04 -6.39 -0.30%
NASD 5,215.97 -34.29 -0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/27/2016 4:35 PM
^DJI $18169.68 Down -29.65 -0.16%
NBG.DL $0.00 Down +0.00 +0.00%
National Bank of G… CAPS Rating: ***
SAN $4.90 Up +0.11 +2.30%
Banco Santander Ce… CAPS Rating: *****