At today’s close, the 30-year Treasury bond yielded a parsimonious 2.99%, the ten years 2.59%, and the five years only 2.40%. TWEET. The downward trend has been under way ever since the early 1980s, when the US Federal Reserve under Paul Volcker raised interest rates aggressively and convinced investors that it was committed to beating inflation. Bitcoin: a symptom of market mania — or the new gold? Get the print edition and steer from crisis to recovery. Why Is the 10-Year Treasury Yield So Important? The 10-year is … Conversely, bond yields go up when demand falls. In many cases, yields are close to, or have reached, historic lows, and in some cases are negative (Graph B1). September 2, 2020 by Collin Martin of Charles Schwab Key Points Investors should still consider holding bonds, even though yields are still near all-time lows. As inflation was steadily vanquished, the yields that investors demanded continued to fall. That is the lowest in almost 64 years, since June 1956, according to Bloomberg’s records. This happens largely because the bond market is … SHARE. And so, with bonds having a particularly accentuated euphoric run (fair to say both in terms of speed + magnitude), I think it's definitely worth asking if bond yields are too low. SHARE. Economic data last week was generally ho-hum except for two reports. In other words, an upward change in the 10-year Treasury bond's yield from 2.2% to 2.6% is a negative condition for the bond market, because the bond's interest rate moves up when the bond market trends down. Why Own Bonds When Yields Are So Low? Any move will have to be refracted through the world’s busy capital markets. Higher inflation generally leads to higher interest rates and higher bond yields. First, falling bond yields are driven by the macroeconomy, and are nothing new. U.S. debt is attractive to investors seeking high liquidity and lower default risk. While the relationship between bond markets and stock markets is complex, lower bond yields might support higher stock prices as investors seek higher returns. Inflation is still muted. Some thoughts: Bonds hedge stock market volatility. If we really do enter a period of long-term -2% a year deflation, that means the purchasing power of a dollar increases by 35% every decade in real terms. It’s a fair question a number of investors are asking themselves as we stare at generationally low yields in safe assets. Indeed, a couple of things should be standing out at this point. Why are bond yields so low? For the week, the S&P 500 lost 0.03%, the Dow fell 0.55%, and the Nasdaq gained 0.46%. Regulatory reforms have caused many banks to withdraw from making a market in bonds themselves, which means that they do not hold an inventory of bonds to keep the market liquid in the event of heavy selling. 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. Second: bond yields have significantly diverged from the same recently. So a steady rise in yields might be greatly welcomed. That is the point. A rival and very popular theory applies to the shorter term, and pins the blame on precisely this monetary policy by central banks. First: bond yields over the long run tend to roughly follow the path of longer term nominal growth. What is most alarming about this theory, which explains events before and after the financial crisis, is that there is no obvious solution. This is actually a very interesting question. The real benefit of bonds is that you know already how much money you are going to lose over ten years if you hold to maturity. 1) Bonds Tend to Rise When Stocks Fall Though expected bond returns are likely to be low for the next decade, during periods of market turbulence bonds tend to do quite well. This matters. If you take two bonds within a sector (in this case, sovereign debt), and compare yields, the lower yielding bond would generally indicate a security of less risk. Lower inflation expectations directly feed through to lower bond yields, as they mean that investors expect their coupon payments to hold on to more of their value. And central banks already hold many bonds and keep them out of circulation, meaning that the effect on prices in what remains of the market could be magnified. “The consensus view is that bond yields will behave differently coming out of this recession than they have in the past,” said Ryan Detrick, LPL Financial Chief Market Strategist. 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