Part 7/13:
Retirees holding bonds risk losing purchasing power, as the return on bonds lags far behind inflation. For example, a 10-year treasury yielding only 1.5% effectively loses value when inflation exceeds that rate—meaning retirees could see a substantial erosion of their savings. The risk of systemic collapse, reminiscent of past crises like 2008, looms if rate hikes are implemented abruptly.
The ongoing balance sheet adjustments by the Federal Reserve are critical. The suggestion is to gradually taper bond purchases rather than pull back abruptly, which might trigger a crash akin to the housing crisis. Managing this delicate transition is essential to avoid catastrophic fallout.