The Sharp Rise In U.S. High Quality Bond Yields


U.S. investment grade bond yields have risen considerably in recent weeks, an extension of the move that started in early July 2016. For example, the yield on the 10-year Treasury note was 1.37% on July 8, 2016, had risen to 1.86% at the end of October, and has now shot up to as high as 2.40% intraday in late November. We are currently just shy of the multi-year highs of 2.50% set in June 2015.

Bond Yields

The fundamental rationale for the more recent increase in bond market yields is fairly straightforward. Investors perceive that the largely unanticipated rise of President-elect Donald Trump is likely to usher in a reduction of burdensome government regulation of the private sector economy, in addition to increased fiscal stimulus through infrastructure-focused deficit spending, which will reduce pressure on the Federal Reserve to maintain extraordinary levels of monetary accommodation.

Rising bond yields are also understandable from the perspective of real inflation-adjusted returns. Core inflation, as measured by the core personal consumption expenditures (PCE) deflator – the Fed’s favored gauge of inflation – has held steady at 1.6% to 1.7% for the entirety of 2016. The yield on the 10-year Treasury note has now moved significantly back into positive inflation-adjusted territory in the aftermath of the U.S. presidential election. From this perspective, the U.S. election results have let some of the air out of the negative inflation-adjusted U.S. investment grade bond market bubble.

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