That would change everything about the economy as we know it . Bill Gross , the man who got very rich running bond funds during one of the greatest bull markets in history , declared his strategy was “ dead .” My Bloomberg Opinion colleague Aaron Brown convincingly argues that there are still good reasons to invest in bonds , but Gross is probably right that it no longer makes sense to look to bonds as both a hedge and for consistent high returns .
In retrospect , it seems clear it wouldn ’ t last . But the bond market of the last few decades made it possible to believe we lived in a world with no trade-offs . Governments could borrow money to spend
The biggest beneficiaries will be retirees , most of whom have paid off their mortgages and have more assets . Higher rates will mean their money goes further in retirement .
or cut taxes . Venture capital and private equity , flush with cash seeking a positive yield , did not have to be so particular about where they invested . Low interest rates buoyed stock valuations . Firms could lever up and expand without a worry how it would all be paid back .
The return of the high-rate environment means that , once again , investment has more of an opportunity cost and downside risk .
It is not all bad . A higher-rate environment doesn ’ t necessarily mean less investment , for instance ; some of history ’ s most robust and productive periods took place when rates were higher than they are now . A higher-rate environment will also encourage a healthier relationship with risk . Bond yields are the foundation of how risk is priced and measured , and a zero-rate environment distorted our relationship with it .
And while mortgage rates and interest on auto loans and consumer credit will be higher , there are some benefits to consumers . Savers will once again get a positive yield for investing in low-risk assets — at least before inflation . The biggest beneficiaries will be retirees , most of whom have paid off their mortgages and have more assets . Higher rates will mean their money goes further in retirement . For at least one segment of the population , returning to real life after the holiday won ’ t be so painful .
ALLISON SCHRAGER is a Bloomberg Opinion columnist covering economics . A senior fellow at the Manhattan Institute , she is author of An Economist Walks Into a Brothel : And Other Unexpected Places to Understand Risk .
It ’ s Been Quite A Ride
For bond investors , the last four decades have been one of the greatest bull markets in history .
10
■ 10-Year Real Yield
5
0
– 5 1982 1990 2000 2010 2010
Source : U . S . Federal Reserve . Note : Not seasonally adjusted .
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