David Roberts

What do 3% US bond yields mean for investors?

David Roberts

As several news outlets reported this morning, US 10-year bond yields have climbed above 3% for the first time since 2014 – which provides a good opportunity to revisit our February blog.

Despite the press reaction, 3% is really little surprise given the underlying economics. There is less demand for bonds as quantitative easing (QE) dissipates and those still buying, including us, are demanding a fair price rather than the artificially low levels of the past 10 years.

There is also a decent chance we fall back below the 3% level later today.

In our previous piece, we mentioned the US yield curve as a lead indicator and we reiterate that view: when the curve stops flattening (where long bonds are outperforming short), that normally signals a recession in six months. The good news is that the market continues to flatten, suggesting we still have some time until growth falters.

What does this mean for bonds? Well, we would say yields at around 3% are starting to look worth a punt. Indeed, US corporate bonds are now paying around 4.5% and that has historically been a decent level to start buying. This is not a level where you will get rich, but it does mean you could receive a nominal return of close to 50% over the next 10 years just by buying and holding the asset class. We think that gives us a lot of protection against inflation as well as the potential volatility of the stock market.

In our new Liontrust GF Strategic Bond portfolio, we have just bought a little US debt. It is more attractively priced than for the past five years and we prefer to buy bonds that have fallen rather than those on the rise. It is still too early to move to a full market/peer group/index risk weighting but increasing our beta from around 0.7 to 0.8 at the new improved level makes sense.

Key Risks & Disclaimer

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

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Wednesday, April 25, 2018, 3:15 PM