Mint Wealth Advisors Media, PA Office is Open for AppointmentsSchedule an Appointment

Under-the-Radar Signal That Rates May Head Higher

The 10-year Treasury yield has stayed in a narrow range since April 2020, helped by a supportive Federal Reserve and ongoing concerns about the COVID-19 pandemic. As shown in LPL’s Chart of the Day, the 10-year Treasury yield actually is sitting below inflation right now as measured by the Consumer Price Index (CPI) excluding food and energy. A negative real yield (a yield lower than inflation) was once rare, occurring periodically in the 1970s and early ‘80s due to high inflation, but since the start of 2011 the 10-year Treasury real yield has been negative almost 40% of the time.

“Negative real rates may be another sign that interest rates may push higher,” said LPL Financial Chief Market Strategist Ryan Detrick. “Even a return to the middle of the range since 2011 implies a 10-year Treasury yield of 2.1%, although it would likely take some time to get there.”

negative real yield has become more common

The average 10-year Treasury real yield since the start of 2011 has been about 0.25%, which means the actual yield has been just a little bit higher than inflation, on average. Since 2012 the highest level of real yield was 1.3%, well below the long-term historical average (dating back to 1962) of 2.3%. We suspect the range since 2011 will remain the norm as global central banks continue to keep policy rates low. If core inflation returns to 1.9%, its average since 2011, it would imply a 10-year Treasury yield of 2.1%. However, even if plausible, it could take some time to get there, probably years.

Even spread out over several years that would be a headwind for investment-grade bond investors(bond prices fall as yields rise). Still, we believe investment-grade bonds are likely to remain useful portfolio diversifiers and the income from bonds should be enough to generate a positive total return if getting back to the historical average were spread out over three or more years, as we expect. Reducing the interest rate sensitivity of bond holdings and increasing the credit sensitivity would create more resilience in a rising rate environment, although at the potential cost of some diversification benefit.

With yields low, it’s unlikely to be as easy an environment for bond investors looking forward as it’s been over the last five, or even twenty-five, years. But quality bonds still have a role to play for appropriate investors in a diversified portfolio—they just may require more care and patience than they have in the past.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.

Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

  • Not Insured by FDIC/NCUA or Any Other Government Agency
  • Not Bank/Credit Union Guaranteed
  • Not Bank/Credit Union Deposits or Obligations
  • May Lose Value