BONDS TAKE A DIVE

Physician's Money Digest, August31 2003, Volume 10, Issue 16

As recession and the FederalReserve have pushed interest rates tohistoric lows, bond prices, whichmove in the opposite direction ofinterest rates, have taken off, leavingbond holders ecstatic. Recent goodnews on the economy, however,threatens to put a crimp in the bondrally. Bonds like a low-growth environment,so word that the 2003 secondquarter gross domestic productgrowth came in at the annual rate of2.4%—much higher than expected—plunged bond investors intogloom mode, pushing prices downand interest rates up to heights notseen in over a year.Bonds are also suffering fromoversupply, as the federal governmenthas switched from buying backbonds with surplus funds to offeringnew bonds to finance the growingnational debt. The problem, WallStreet watchers say, is that risinginterest rates may choke off the veryeconomic recovery they foreshadowby throwing a monkey wrench intothe housing market, which has been amainstay of the nation's economythroughout the recession.With mortgagerates no longer in the cellar,buyers and refinancers will be morewary about taking action. Anotherthreat is that higher interest costsmay cause corporations to put offplans to increase capital spendingand hire more workers, 2 elementsthat economists believe are the key toa true economic recovery.