Should Bond Holders Be Worried?

Focus: INCOME

The positive start to earnings season and sharp improvement of China's December trade surplus has buoyed the market as MoneyShow's Tom Aspray examines how a surging stock market could affect bonds.

Wednesday's gain in the stock market indicates that the market's correction may now be over as the advancing stocks led the decliners by a 2-1 margin. Therefore the Advance/Decline line is leading prices higher, which is a positive sign.

A strong close in the S&P 500 above 1466 should signal a rally to the 1495-1505 area. This would certainly squeeze many on the short side, but I don't think it will convince the long-term pessimists. They are likely to find more signs of economic weakness or political Armageddon to add to their "wall of worry."

If stocks do accelerate to the upside, a more interesting question is what will happen to bonds? While stocks surged to start the New Year the bond market was hit hard as the yield on the 10-year Treasury Note rose from 1.756% to over 1.965% in just three days.

This certainly got the attention of some bond holders but most seem to be quite complacent. In 2012, there was an inflow of $56 billion to bond funds, so the lack of any great concern by bond holders is not surprising.