Long-term dangers lurk in financial markets

Financial markets have a long-term bias, and this isn’t always a good thing.

The trends of the past decade — low interest rates and volatility, with bonds cushioning stock selloffs — have reversed in the past two years. 

But one indicator from the era of near-zero rates has remained unchanged: Markets don’t demand much extra return in exchange for locking away their money for longer periods.

The Federal Reserve estimates the “term premium” needed for investors to buy 10-year government bonds, rather than stash their money in a money-market fund is low.

Unless an investor or a market maker is 100% sure that a 10-year bond will be held to maturity, there is a risk that it will need to be sold at an unfavorable time.