As the Federal Reserve prepared to raise interest rates last year, fears were rampant that rising interest rates would hurt bond investments by driving up bond yields (bond prices and bond yields move in opposite directions). Yet bond yields have actually declined since the Fed took action in December. Even after a recent uptick amid receding fears of a global recession the yield on 10-year treasury bonds is below 2%, a very low level by historical standards. Should investors still be concerned about rising bond yields?
There’s no immutable law of economics saying that bond yields have to rise back to what historically have been more “normal” levels. The yield on 10-year Japanese government bonds has been below 2% since the late 1990’s, and it’s now below 0% (that’s not a typo; it’s actually negative). Some of the factors that have contributed to these persistent low yields, such as Japan’s aging population, are starting to affect the US and other countries as well.
That doesn’t mean perpetual low bond yields are a certainty. Faster economic growth or a higher inflation rate could push bond yields up, and there are some signs that these trends could be starting to develop. The US economy has added an average of more than 250,000 jobs per month over the past 5 months, and there have recently been indications that inflation, long dormant, may be starting to come back to life.
But even if bond yields do rise from their current levels, they’re unlikely to soar. The global economy is still weak, and the inflation rate, though rising, is still well below the Fed’s 2% target. Furthermore the downward pressure on bond yields from the aging population is likely to continue. Yields may be very low by historical standards, don’t be shocked if they stay that way a while longer.