Why bond yields will continue their upward trend

Despite recent evidence to the contrary, bonds yields should continue their upward trend—even reaching “a new cyclical peak in no time,” says a Desjardins economics report.

So, why have yields been falling?

Since mid-May, U.S. 10-year yields dropped from more than 3.10% to about 2.85% in mid-July. Likewise, yields for Canadian 10-years fell from about 2.50% to about 2.10% during the same time period.

The decline is noteworthy, says Desjardins, given the tightening of monetary policies in North America and the resulting upside pressures on short-term yields.

The bank says the decline can be explained by investors’ expectations of Fed rate hikes, which are “highly conservative for 2019,” shown by futures on federal funds.

Read: Bond positioning as yields rise

“Investors seem positioned for a scenario in which trade tensions would have few negative consequences on the economy but would convince central banks to taper their monetary tightening as of next year,” says the report. “This scenario does not appear very likely in our view.”

More likely is that trade tariffs will spur inflation rather than slow U.S. economic growth, at least in the short term, the report says.

And, if inflation were to reach worrisome levels, the result would likely be “more significant hikes in key rates and bond yields than we currently anticipate, and [would] deal the stock markets a major blow,” says the report.

The bank expects the U.S. two-year yield to end the year at about 2.90%, and the 10-year yield to climb to 3.30%.

It adds that long-term bond yields could easily post a sharper increase if inflationary pressures continue.

Read the full report from Desjardins.

Also read:

Finding balance amid worldwide QE slowdown

What to expect from the Fed in 2019

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.