Fixed Income Yields and Drivers
Portfolio consultants Mark Cintolo and Kevin McCullough discuss the recent surge in bond yields and the factors likely to influence the future trajectory of fixed income rates.
- Reviewing the fundamentals, the main drivers of Treasury yields are expected inflation, inflation uncertainty, Federal Reserve policy and the long-term growth outlook.
- Remaining inflation uncertainty is keeping interest rates elevated, but also acts as a potential catalyst for a future decline in rates.
- Regarding technical factors, the increasing supply of Treasury securities is a factor in some of the recent yield increases, as well as a source of uncertainty for yield changes in the future.
- Apart from Treasuries, favorable supply and demand dynamics are making corporate bonds an attractive asset class.
- Looking out over the next year, if we get a continuation of higher rates for longer, companies might still hesitate to issue debt at those higher yields.
- Meanwhile a higher rate environment would probably mean the economy is still holding up, and investors might be more open to risk taking in general.
- Conversely, if inflation cools and we have slower growth or even a mild recession, we should see a larger decline in yields – and that becomes a great environment for bonds in general.
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This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions.
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