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September 25, 2017 at 11:13 PM
Despite indications that the Federal Reserve will likely raise short-term rates before year-end and that its favorite inflation measure will reach the bank’s 2% target by 2019, investors looking to collect more income from bonds should not expect yields will rise much from current levels.
Even the shinkage of the Fed’s reserves to unwind its QE purchases — a program some are calling “QT,” or quantitative tightening — is not expected to increase bond yields much because the wind-down will be gradual.
(Related: Fed to Begin Balance Sheet Cuts; Hints Rate Hike Up Next)
Nathan Zahm, a senior investment analyst at Vanguard Investment Strategy Institute, recently told Bloomberg News that investors should expect a decade of “muted returns” including 2% to 3% for bonds and 5% to 8% for stocks.
(Related: Wall Street’s Bond Gurus Have It All Wrong as QE Unwind Looms)
John Lonski, chief economist at Moody’s Capital Markets Research, wrote in a recent commentary that “consumer price inflation lacks both the speed and breadth necessary for a lasting … 10-year Treasury yield of at least 2.5%.”
(Related: New Strategy to Navigate Market Volitility, Sept. 21 webcast with Michael Finke)
The 10-year Treasury is currently yielding about 2.25%, a level too low to pay investors for taking on the additional market risk of a long-term bond compared to short-term securities, according to many strategists.
Referring to that spread, Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, noted at a recent meeting that the term premium for long-term Treasuries, adjusted for inflation, is currently negative.
