Bond market is bracing for the worst and loading up on cash

BY: Akin Oyedele
Bond investors are bracing for the worst. The Federal Reserve has signalled that, barring some unexpected economic shock, interest rates will most likely rise this year.

And that's cause for unease for fixed income investors.

Bonds lose value because as rates and yields rise, it weakens the value of bonds, and makes it harder to sell existing notes with lower yields.

In a report Monday, Bloomberg's Lisa Abramowicz highlights that bond funds are now holding 8% of their assets in cash, the highest rate since 1999.

Abramowicz spoke to Jerry Cudzil, who heads TCW Group's US credit trading, and said "We're as defensive as we've been since pre-crisis." TCW's credit funds, Abramowicz notes, are holding the most cash since the 2008 financial crisis.

Coupled with the concern about rising rates is that investors will struggle to find buyers when everyone rushes for the exit on bonds. This - a lack of liquidity - was also mentioned in the Federal Reserve's monetary policy statement in May.

On Friday, we highlighted data from Bank of America Merril Lynch showing that last week, investors pulled the most money on record from government bonds, with the firm noting that worries about rising interest rates were part of the catalyst for the flight.

And so it looks like, on some level, the rush for the exit has already started.