The 10 yr treasury yield has been going lower this week with a low hit this morning of 1.63%. There are many factors contributing to the drop in yields. One major factor is that most long term government bond yields around the globe are trading with negative yields, which makes our current yield of 1.63% very attractive. The fed seems to be ready to raise rates so this phenomena may seem a bit odd, because normally interest rates go up when the fed raises rates. We believe that these conditions will eventually come to pass but lower yields for longer seem to be the rue of the day.
One area that may help push yields higher in the coming years is inflation. With the increase in labor costs, we should see an increase in inflation albeit at a moderate amount. Presently, labor costs are surpassing expectations and this should put enough pressure on the Fed to raise interest rates. If that scenario persists, we will eventually see bond prices fall and yields going back up. If you are a risk averse investor and currently have a portfolio of bonds we would suggest staying the course; however, if you are invested in a bond mutual fund it might be time to consider reducing your position.
