Investor caution urged as US bond yields rise

Investors should remain cautious of the sharp rise in bond yields and pay attention to the headlines real and imagined, says deVere Group’s international investment strategist.

The independent financial advisory group notes that the yield on US benchmark 10-year Treasury notes rose to an 18-month high of 2.4% last Friday, but as recently as June had stood at 1.5%. Similarly, the two-year note’s yield began this week at the highest since late December.

“US bond yields are ‎rising for good reason: Trump is promising to cut taxes, increase spending and deregulate,” comments strategist Tom Elliott. “The president-elect’s likely Keynesian fiscal stimulus program, of lower business and personal taxes with higher spending on infrastructure, would be implemented whilst the US economy is already growing at a decent pace – 2.9% in Q3 at an annualised rate – and is at almost full employment.

“This cocktail generates growth – at least in the short to medium-term – but it also produces inflation. Bond yields may continue to rise, resulting in losses for investors who enter the fixed income market at this moment.

“However, fears of hyperinflation and a return to 15% bond yields seen in the early 1980s are an over-reaction. The so-called ‘baby boomers’ are beginning to retire in large numbers, thereby reducing household consumption, which is a deflationary force.  In addition, assuming the Fed remains independent, it will raise rates to counter inflation – and investors need to remain vigilant on this.

“Many investors have been attracted by the significant rise in yields. There will be a good entry point over the coming two to three years, but we are probably not there yet. Investors should remain cautious and pay attention to the headlines – real and imagined.

“Yields are incredibly sensitive to the Fed’s policy outlook and it is likely to raise rates next month due to Trump’s expected expansionary policies, which are likely to create ‘Trumpflation’.

“As always, a good fund manager and real diversification by asset class, sector, geographical regions and currency exposure is an investor’s safest bet to ensure that they accumulate wealth in changing geopolitical scenarios.”


Related reading