Flirting with Higher Interest Rates

Flirting with Higher Interest Rates

December 05, 2016
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Last week, yields on 10-year Treasury bonds rose to a 17-month high of 2.44 percent, reported The Wall Street Journal, before retreating to finish the week at about 2.4 percent.

As we’ve mentioned previously, some experts suspect the bull market in bonds, which has persisted for more than 30 years, may be headed into bear territory. In part, this is because the U.S. Federal Reserve is expected to increase the fed funds rate in December. Last week, CME’sFedWatch Tool indicated there was almost a 99 percent chance the Fed would raise rates in December. Bond yields often reflect the actions of the Fed. If interest rates rise, bond prices move lower, resulting in a higher bond yields.

Another issue affecting interest rates is inflation. For several years, low inflation has supported the “trend within markets…to invest in rate-sensitive investments like bonds, which benefit from low inflation, and their equity surrogates which benefit from falling bond yields,” wrote Schroders.

In recent weeks, the bond market has been influenced by inflation prospects. The Wall Street Journal explained:

“Worries about higher inflation have been a main factor fueling one of the biggest bond market selloffs since the crisis over the past weeks. The selloff had accelerated after the U.S. election in early November. Investors then had bet that the prospect of expansive fiscal and economy policy from the new U.S. administration would lead to stronger growth and higher inflation.”

Last week, a measure of wage inflation moved slightly lower. This appears to have assuaged some investors’ concerns about inflation as bond yields moved lower on Friday.

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