Get Ready for 1% Bond Yields
Inflation is the key to fixed-income assets, and there isn’t any now or expected to be in the future.
The lack of inflation is helping to support bond prices.
Photographer: Mario Tama/Getty Images North AmericaThe yield on the benchmark 10-year U.S. Treasury note was rising toward 3.20% in early October when a survey by Bloomberg News showed that none of the more than 50 economists predicted it would fall below 2.40% by now. The median estimate was 3.33%, a big miss given the current 2.10% yield. Longtime readers of my Bloomberg Opinion columns know my target is 1% over time, and I am more confident than ever in that forecast.
Inflation is the key to longer-term Treasury yields, regardless of actions by the Federal Reserve, fiscal policy, etc. The correlation between longer-term Treasury yields and inflation as measured by the U.S. Labor Department’s Consumer Price Index over the entire post-World War II era is a high 60%. Also, the further out the yield curve, the less Fed actions matter. Since the 1950s, a 100 basis-point move in the federal funds rate, on average, results in a 44 basis-point change in 10-year yields and just 24 basis points in 30-year yields.