Views on Fixed Income: Simple History in Pictures (Part One)
- Bond yields have fallen across the board over the last 10 years (and beyond)
- Price inflation (rate of price increases for what consumers buy) has been fairly constant over the last decade
- Could bond yields have fallen too far too fast? It depends on inflation and the economy.
Let’s take a walk down memory lane. Where were you 10 years ago at this time?
Do you remember when banks used to offer 4% rates on money market accounts? Today, bank depositors would be fortunate to get 1%.
Since the eve of the Great Recession in 2007, US Treasury yields have declined considerably from over 5% to levels around 2.4% currently. Fears of permanent economic damage in terms of lower growth and deflation along with strong intervention via purchases of government bonds by the Federal Reserve have pushed long-term Treasury bond yields down to historically low levels.
Bonds have had a tremendous run with yields falling and prices strongly rallying since their peak in 1981. Will the good times keep on rolling? Or are we due for a reversion to the mean?
The strength of the US economy (or lack thereof) is one factor that could determine the direction of future bond yields. Another factor is inflation, the rate at which prices on the goods and services consumers and businesses purchase increases.
