The unrelenting move higher in U.S. Treasury yields continued last week making it the 15th week (out of the past 16 weeks) that the yield on the 10-year U.S. Treasury security ended the week higher. Moreover, 10-year Treasury yields have increased by 130 basis points (1.3%) this year with a 110 basis points (1.1%) increase in yields since March 3. And the selloff has impacted all yields on the Treasury yield curve. From a historical perspective, the change in yields has been extraordinary: 2-year Treasury yields have risen by 170 basis points year to date, an amount that has only been materially exceeded during the 1994 Federal Reserve (Fed) hiking cycle (over the whole year), and in the 1970s. The near-term uncertainty regarding the inflation outlook as well as the Fed’s expected response to stubbornly high increases in consumer prices have driven yields higher this year. This largely one-way move higher in yields has caused returns for most fixed income indexes to be among the worst to start the year in decades.
“No doubt, this year has been painful for fixed income investors,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “However, the silver lining in this historic selloff is that higher yields generally mean higher potential returns. And with interest rates higher than they’ve been over the past few years, now could be a good time to revisit fixed income as an investment.”
That said, the already historic selloff this year has provided potential fixed income opportunities not seen in years. As seen on the LPL Chart of the Day, yields for many of the core fixed income markets (U.S. Treasuries, mortgage-backed securities, and investment-grade corporate securities) are close to the highest levels since the beginning of 2010. Starting yield levels are the best predictor of future returns so with yields increasing meaningfully this year, future returns look more attractive than they have in years. With interest rates as low as they’ve been over the past few years, the back-up in yields could be an attractive opportunity for income oriented investors. And while we can’t guarantee that interest rates won’t go higher, at current yields, the risk/reward for owning fixed income has improved, in our opinion.
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