With all the election chatter and stock market volatility, it may have been easy to miss the ongoing uptrend in long-term interest rates.
The yield on the 10-year Treasury bond is sitting just below 1%. Just a few short months ago, the 10-year was yielding roughly 0.5%.1
What's fueling the rally? More demand for money, which is the result of a pickup in economic activity. When businesses see economic conditions improving, they look to expand their operations. When entrepreneurs see exciting new opportunities, they look to raise money to finance their projects.2
By contrast, a weaker economy tends to promote a "flight to quality," which increases the demand for treasuries and drives yields lower.3
Will interest rates continue to go higher? That’s uncertain. Rates fluctuate, and there’s a possibility that long-term interest rates may reverse course and start to trend lower. A lot will depend on business confidence in the months ahead.
With rates ticking higher, some people may wonder if it's an opportunity to boost bonds' exposure to capture the higher rates. It's a good thought, but you can consider many factors before boosting the bond portion of an allocation model, including the outlook for inflation, the dollar, and other macroeconomic factors.
If you have an idea about what’s next for the economy, please give us a call. We’d welcome the chance to hear your thoughts.
- Yahoo.com, November 2, 2020
- Manhattan Institute for Public Policy, 2020
- Investopedia.com, June 25, 2019
Treasury bonds are guaranteed by the federal government as to the timely payment of principal and interest. By holding a bond to maturity an investor will receive the interest payments due plus your original principal, However, if you sell a Treasury bill prior to maturity, it could be worth more or less than the original price paid. Investments seeking to achieve higher yields also involve a higher degree of risk. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss. Investing involves risks, and investment decisions should be based on your own goals, time horizon and tolerance for risk.