Future returns on bonds may be disappointing

U.S. Treasury yields hit their lowest levels in U.S. history in recent weeks. The yield on a 10-year Treasury security hit a new low of 1.32% a few weeks ago (it has since increased to 1.56%). That was the lowest rate on such bonds in 227 years.

Even at that rate Treasuries are “high yield” relative to some other major government bonds. In the United Kingdom the rate recently was just 0.8%, while yields on 10-year German and Japanese bonds are negative. Negative yields mean that buyers are paying the bond issuers in order to hold their bonds!

The rates on corporate and municipal bonds have also declined along with long-term government bonds. The Federal Reserve – which raised short-term rates from zero to 0.25% last December – has been stymied in its campaign to keep raising rates by events such as Britain’s recent vote to exit the European Union.

The New York Times recently noted that prices being paid for government-issued inflation-protected bonds suggest that prices will rise by only about 1.4% over the next five years. “They suggest that not only is the Federal Reserve unlikely to find conditions that warrant an interest rate increase in the remainder of 2016, but also that there is only about a 50% chance of a rate increase in 2017,” The Times reported.

It also means that riskier investments such as stocks, commodities, and real estate investment trusts may be the only places for investors to obtain more meaningful returns. This year that has been the case. For instance, the Standard & Poor’s 500 Stocks Index is up over 7% so far this year.

Richard Schroeder, CFP®

July 19, 2016

Richard Schroeder
Richard Schroeder