Bond yields low, could remain that way

 Joseph G. Mowrer III, The Daily Record Newswire

Bond yields are low. They have been trending lower for all of 2014, with an alarmingly sharp downward move recently. This downward direction in yield directly contradicts what nearly every market expert had predicted at the start of the year.

At the beginning of 2014, the general consensus was that bond yields would steadily rise throughout the year as the economy improved and the Fed reduced its stimulus. Instead we have seen just the opposite. To date, the yield on the 10-year Treasury bond has made an incredible move from roughly 3 percent to 2 percent. Investors who avoided bonds at the start of the year for fear of rising rates have missed a tremendous rally in the bond market. To date, the 10-Year Treasury bond has returned over 10 percent.

It goes to show that no one knows which way interest rates will move next. Although interest rates are low by historical standards, there is no reason to assume they cannot stay where they are for a long time, or perhaps even go lower. In fact, there may be some reasons to support that bond yields could indeed remain at these suppressed levels for some time.

One compelling reason to believe low bond yields in the U.S could persist is that bond yields are even lower in most other developed countries, particularly Europe. Below is a table with current comparable European bond yields:

Country 10-Year Bond Yield

Switzerland 0.40%

Germany 0.82%

France 1.25%

United Kingdom 2.08%

U.S. 2.16%

*As of 10/16/201

As economic conditions in Europe worsen, as they have been doing, there is a natural tendency for capital to move to the safest assets. U.S. Treasury Bonds fit this description, and as the table shows, boast significantly higher bond yields than their European counterparts. While this is no guarantee that rates will stay down in the U.S, it is a strong reason to support that a sharp rise in yields is unlikely to occur anytime soon.

Bond investors are risk averse — perhaps more so than stock market investors. While no one likes to lose money, the prospect of negative returns is probably more painful for bond investors. But rather than worry about where bond yields will be a month or year from now, bond investors should take a long-term view and stick to their bond allocation (age as a percentage is a good guideline).

Regardless of which direction interest rates move, it is nearly impossible to lose money in the bond market over any long period of time with a high quality bond portfolio (not considering inflation). Attempting to time the bond market is a guess and runs the risk of a significant missed opportunity. Bond investors should instead pay little attention to predictions of interest rates, and instead maintain a reasonable allocation to bonds for the long run.

—————

Joseph G. Mowrer III is a senior tax-sensitive fixed income analyst for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.