What Now for Bonds?

February 26, 2018

After years of waiting, bond yields have finally crept upwards. Since the beginning of the year, the 10 Year Treasury yield has increased about 20% to 2.92% as of last Friday. The question remains, how much further will yields increase this year and what should investors do to protect themselves?

 

With a backdrop of accelerating growth in the United States and tailwinds from tax cuts, unemployment has fallen significantly below historical averages putting pressure on wages. In this environment, inflation potentially looms on the horizon based on previous market cycles. With eyes on the Federal Reserve, rates have begun to move in anticipation of an accelerated tightening progression to keep inflation in check and the economy from overheating. So how should a bond investor approach the future?

 

The first is to not panic over the recent moves. Higher rates may be painful in the short-term but are better for bond investors in the long term. Market timing these moves are incredibly difficult and the greater risk would be to lose the income and diversification benefits especially in a time of increased volatility. As PIMCO likes to say, we want to make sure and be liquidity providers, not takers in an environment like this. This means that we want to hold on to conservative assets and be ready to buy out of favor parts of the market if fear strikes again.

 

It is always important to remember that the global bond market is worth around 110 trillion dollars and that means there are plenty of opportunities still available. Also of note, many nations (like parts of the Eurozone) are still years behind us in the market cycle and their low yields will have a suppressing effect on our own.

 

We maintain our vigilance as we get later and later into the business cycle with an eye towards safety to make sure our investors meet their goals.  

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