The bond market has found new life. Going back to the mid 1980’s, the yield on the 10 year US Treasury bond had been in a very well defined long-term downtrend which was indicative of a strong bond market. Recall that when the yield on bonds is falling, it is a reflection of their prices rising (and vice versa). The bull market in bonds appeared to have finally run its course last fall when bonds weakened and the yield broke the downtrend when it shot above 3.00%, hitting a high of 3.25% in October.
However, in early November bonds reversed course and rallied again on the belief that interest rates might drop due to the global economy slowing and concerns that the Federal Reserve’s monetary policy was becoming too restrictive. The yield on the 10 year Treasury has been trending lower ever since and hit a low last Friday of 2.14%, a sharp reversal from the 3.25% mark hit late last year, and the lowest yield on this benchmark bond since the fall of 2017. This bond strength and rate drop has most recently been driven by renewed concerns about the trade war with China and resulting stock market volatility.
How low rates can go remains to be seen. I read one market strategist’s comment recently who said “think Japan.” Japan’s 10 year government bond yield has also been in a long-term downtrend, but instead of yielding a little over 2% now, it is right around 0% (a shade below actually, which is another topic for another day). While I don’t know that I concur with this prediction, it is something to consider.
So what are the implications of all this? Despite high quality bonds not having particularly attractive yields, they have again proven their merits in a portfolio for investors seeking to moderate the volatility inherent in the stock market. While stocks got clocked last month due to the trade war with China, high quality bonds – and Treasuries in particular – have done well, helping to offset volatility in balanced portfolios.