strategic research report
WHAT’S NEXT FOR THE BOND MARKET? Eric J. Freedman
a proxy for key lending rates like mortgages
CAPTRUST Chief Investment Officer
and an oft-cited gauge of bond market
Following a 30-plus-year bull market in the fixed income or bond market, the path forward is much more uncertain. While investors await the next move for fixed income, unless bond prices move higher (and, by definition, bond yields move lower), historically low interest rates indicate that bonds will offer lower total returns than most bond investors have experienced during recent periods.
movements, rose from 1.64 percent on May 1 to 2.16 percent on June 1, which in percentage terms was the largest month-overmonth increase in yield history. Through late August, the 10-year Treasury continued its rise, hovering at levels not seen since in over two years. Many yield-sensitive asset classes and sectors have had sluggish performance in sympathy with higher interest rates, including corporate bonds, municipal bonds, public real estate, and some yield-
Fears that the U.S. Federal Reserve would
producing sectors in the stock market. As
soon begin to rein in its bond-buying
investors have reached for yield across a
program have hurt fixed income in general.
variety of asset classes including those just
As a reminder, bond yields move in the
mentioned, market observers remain focused
opposite direction of prices, so when bond
on Federal Reserve guidance regarding future
yields increase, by definition their prices
accommodation, which as of press time
concurrently fall. The 10-year Treasury yield,
remained unclear. Where Will Interest Rates Go From Here?
Figure One: Yield-Oriented Assets Q2 2013 Performance
Looking at Figure Two, one can see that since the summer of 2011, 10-year Treasury
-2.3%
BarCap Aggregate Bond Index
-3.0%
BarCap Municipal Bond Index
yields have been firmly below 3 percent. This is due to global central banks’ active suppression of interest rates through buying fixed income securities in the open market
Source: Bloomberg, Zephyr
-1.4%
BarCap U.S. Corporate High Yield Index
in an attempt to encourage lending and
-7.0%
BarCap U.S. Treasury: U.S. Treasury TIPS Index
Federal Reserve has recently hinted that
-3.2%
S&P U.S. Preferred Stock Index
to slow, leaving investors to question who
spark economic activity. However, the U.S. those open market purchases could begin will replace the Fed and buy bonds. This
2.0%
Alerian MLP Index
speculation led to the second quarter’s weak bond market returns.
-3.3% -7%
-6%
-5%
-4%
-3%
-2%
-1%
Dow Jones U.S. Real Estate Index
0%
1%
2%
Per Figure Two, it appears we are approaching interest rate levels that are continued inside