Investors have streamed into bond funds since the market crash of 2008. Bonds were delivering strong returns, and many had lost confidence in the stock market after its implosion. McBride said many of these investors aren't prepared for the losses they would face if the economy grew strongly or if inflation rose.
For people who keep their money in savings accounts and CDs, meanwhile, any rise in long-term rates will have little effect. The Fed is keeping short-term rates near zero. A six-month CD tracks the tiny yield on the six-month Treasury bill. Both assets compete for the same investor dollars.
In the market for short-term debt, the yield on the three-month T-bill has held steady at 0.08 percent for the past week.
The Fed isn't the only reason why yields fell to historic lows. Banks, governments and investors all over the world streamed into the market for Treasurys over the past two years because many feared that the debt crisis in Europe would touch off another global financial crisis. Euros and debt issued by other governments look far riskier than U.S. investments.
The yield on the 10-year note fell below 2 percent in September mainly because of those concerns.
As confidence returns to the market, traders and investors should watch for rising rates and falling bond prices, McBride said. He said it's not clear when the long-term trend will turn positive.
"The real risk to bond investors is not what happens in the next week or the next year, but what happens in the next 10 years," he said. "If inflation and interest rates take off, the bond market will be a bloodbath."
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