Politics affect the bond markets. And they are the one thing that bond gurus tend to avoid discussing.
But politics like the fiscal cliff issue can change the nature of the bond market by changing tax laws and government spending.
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It also changes the psychological aspect of the market. The low interest rate environment is causing people to chase more yield without being compensated for it.
Riskier assets that offer higher yields may suffer greater hits on principal values when interest rates turn.
Municipalities have also been under unusual stress since 2008 since many have experienced higher costs for pension benefits as the population ages and tax revenue collection has declined.
Credit quality becomes a more critical issue in such cases. Illinois and Puerto Rico are particularly under pressure from fiscal and political sources.
Several cities in California have filed bankruptcy this year. When choosing fixed income investments, it pays to do a great deal more due diligence
than in years past because of all of these influences that formerly did not seem as impactful.