As the world’s biggest bond market, rates on US treasuries is a market indicator that investors cannot afford to ignore. According to Billionaire fund manager Bill Gross, the market is rapidly approaching a point at which the trend will induce an economic slowdown.
Others have claimed that it is only natural, with the Federal Reserve raising short-term interest rates despite the low inflation.
The short-term impact
While the Fed has held on to tightening fiscal policy on fear disrupting markets, it has stuck to its commitment to gradually raise rates. The result of tax hikes can be seen clearly on 2-year treasuries yield as below.
Naturally, an investor would wish to be compensated for holding on to bonds when rates are going up. And this is reflected in it’s yield to maturity accordingly.
What about long-term yield?
Interesting, the yields for longer tenor treasuries are still sluggish or sideways as seen from the chart below. Overall, investors are still expecting returns at the 2.75% to 3% range in the long run.
Yield remains low, in the face of rate hikes.
Supply and demand, the invisible hand of the economy
As yield on long-term treasuries remains low, individual investors may not be allocating a significant part of their investment portfolio towards bonds. However, insurers and pension funds seeking stability may be hard-pressed to find alternatives to the security offered by 30-year Treasuries bonds. Factoring in the rise of passive ETFs funds and one can see where the demands come from.
The era of low-interest rates and what it means to investors?
With the European Central Bank (ECB), Japan and other nations keep rates low to stimulate growth, one would expect the trend of low-interest rates to persist.
However, it is worth noting that the longer the trend continues, the greater the effects on bank earnings and the real economy, while at the same time it would limit the Fed’s and central banks ability to respond when market risks emerge.
When the next bubble burst, what other tricks can be utilised with debt being highly leveraged and interest rates hovering near an all-time low?
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With references from Bloomberg: The U.S. Yield Curve Is Flattening and Here’s Why It Matters
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