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.
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.