Long-term bond yields in major advanced economies have fallen noticeably over the past six months. While the relationship between bond markets and stock markets is complex, lower bond yields might support higher stock prices as investors seek higher returns. SHARE. Source: Global Fianacial Data, AMP Capital How bonds work But first it’s worth a reminder as to how bonds provide returns. Under those conditions, money holds its value, alternative investments have little appeal (as there is so little growth) and investors might as well pile further into bonds. High-quality bond investments can still provide diversification benefits, and there’s a cost to waiting for rates to rise. Below are three reasons to consider. If you buy a ten-year bond at 0.9% and hold it to maturity, you will get 0.9%. On the other hand, frazzled investors may see plummeting Treasury yields as a sign that the economy is not picking up and turn bearish on equities. The Bond Buyer’s 20-year index of general-obligation bonds reset at 2.56% this week. $50 for your first 3 months What they also give you is the option to sell the bond part of the way … The 10-year is … It’s a fair question a number of investors are asking themselves as we stare at generationally low yields in safe assets. Ultimately it’s anyone’s guess as to the precise reason why bond yields are so low but it likely reflects some combination of: Worries about deflation, which is … The market volatility over the last six months has shown financial professionals, employers and employees — and especially those nearing retirement — that protecting what they have worked so hard to save is an essential part of retirement planning.”, Jamie Ohl, president of Retirement Plan Services at Lincoln Financial Group, from her article, “In Retirement, The Ulitmate Outcome Is Income.”, Advertise with Us | 508-641-2418 | [email protected] | Privacy | © 2021 JonHope Publishing Company, Inc. | Find us on Facebook Twitter LinkedIn, Boston-Area Website Design by BKJ Productions. It will set off the mother of all short covering squeezes and could take ten-year yield down to match the 2012, 2.38% low. The federal funds rate is back near zero, the 10-year Treasury yield remains stuck in a 0.5%-to-0.75% range, and inflation-adjusted (real) yields are deep in negative territory. Canary Wharf: does the east London office district have a future? Wednesday: EIA Petroleum Status Report, Janet Yellen Speaks 11:30 AM ET, FOMC Minutes, Thursday: Jobless Claims, PMI Manufacturing Index Flash, Existing Home Sales. Typically, stronger economic performance leads to higher Treasury yields. Another report showed an unexpected jump in April housing starts, which could indicate the beginning of resurgence in the housing market. That means that the number of people working steadily declines, pushing down on growth and hence on interest rates. Should investors prepare for higher inflation in the US? First: bond yields over the long run tend to roughly follow the path of longer term nominal growth. Having already cut rates virtually to zero, they have attempted to push inflation up by buying bonds, a policy known as quantitative easing or QE. The importance of the 10-year Treasury bond yield goes beyond just understanding the return on investment for the security. Indeed, a couple of things should be standing out at this point. Looking ahead, this week is fairly light on economic data, but the housing market will be in the spotlight as analysts determine whether home sales data supports the upward trend in housing starts. Bond yields have been driven down by a confluence of factors, ranging from tame inflation and slow global growth to aggressive central bankers around the world and even Vladimir Putin. EMAIL. Given recent stock market highs and better economic performance, we should see demand for Treasury bonds to go down as investors embrace risk and seek greater returns elsewhere. The purpose of the exercise is to reduce their yield, so it is obviously a factor. Can they conceivably move lower still? It’s a fair question a number of investors are asking themselves as we stare at generationally low yields in safe assets. So why would you even own bonds with rates this low? And what might happen if and when they finally reverse and rise again? Why Are Bond Yields So Low? Investors around the world have been confused, befuddled, and surprised by the persistent, ultra-low level of long-term interest rates in the United States. Investors should still consider holding bonds, even though yields are still near all-time lows. Get alerts on Pensions industry when a new story is published, John Authers examines prospects for rises, Get the print edition and steer from crisis to recovery, Angela Merkel attacks Twitter over Trump ban, US senators balk at Trump impeachment over Capitol siege, Lax approach to England lockdown raises prospect of stricter rules, Saudi Arabia tries to lure multinationals from Dubai, Number of UK vaccination mega-centres to be expanded sevenfold. Higher inflation generally leads to higher interest rates and higher bond yields. Fasten your seat belts, batten the hatches, and down the Dramamine! What happens if bond yields fall further? Increasing longevity has naturally put pension funds under stress, and regulators in several countries have responded by requiring pension managers to buy more bonds, so that the assets in their funds match the liabilities that they will eventually have to pay out in income to pensioners. This arguably harms capitalism’s process of “creative destruction”, where companies that would otherwise have been forced out of business are able to survive in weakened form thanks to low interest rates, while capital is withheld from potentially more profitable recipients. All have some truth to them, but over different timescales. It’s hard to know exactly where bond yields will go, but many analysts think that demand will remain high for the foreseeable future. A sudden increase in yields would raise the risk of bankruptcies and renewed financial crises. If so, bonds are a steal here at 1.41%. This matters. One should subtract expected 10 year future inflation, not past inflation, and you can see the extra volatility that past inflation induces. Image courtesy James Cridland. Is ‘first dose first’ the right vaccination strategy? Why own bonds when yields are low? Why Own Bonds When Yields Are So Low? Money is fungible, and will find its way to wherever a decent yield can be found. That means more buying of bonds. A report from economists at the Fed this month suggested that shifting demographics in the US alone could explain a decline of 1.25 percentage points in the natural growth rate of the US economy since 1980. That is the point. Yields may slowly rise toward their natural equilibrium as economic growth absorbs central banks’ excess holdings. Given the backdrop of low yields in government bond markets across much of the developed world, many investors may be questioning the value of maintaining an allocation to diversified fixed income securities. Why are bond yields so low? Twitter vs Trump: has Big Tech gone too far? First we need to ask how it came to pass that people are prepared to pay for the privilege of lending their money to governments, which is what a negative yield implies. Why Is the 10-Year Treasury Yield So Important? 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