For most of this century, our government has enjoyed very low borrowing costs. The vast majority of this time the yield on the 10-year Treasury bond has been well below 5%. This week the yield has hit 5% and is at a level last seen briefly in October 2023, and before that, just prior to the Global Financial Crisis of 2008. Yields have steadily climbed this year. Contributors to the rise include a steadily rising national debt (having topped $40 trillion in August), persistent inflation, and a still strong economy and labor market. Due to the inverse relationship between bond yields and prices, the Bloomberg U.S. Aggregate bond index is down about 1.5% on a total return basis year-to-date through yesterday.

On the bright side, the higher yields these days make bonds attractive again and reduces the inherent risk of rising interest rates. Back when the 10-year Treasury yield was only 2-3%, it was insufficient to provide protection from a drop in prices if bond yields were to rise. While yields could trend higher, today’s yields could provide an opportune time for investors focused on the shorter end of the yield curve to shift some bond allocations to more traditional intermediate-term bonds.

In response to the persistent inflation the Federal Reserve is expected to raise the Federal Funds rate a quarter of a percent tomorrow. It is important that they do so to demonstrate that they are indeed dedicated to bringing inflation down, opposed to just providing lip-service as seems to occur on occasion. I believe a failure to raise rates would increase the likelihood of a further rise in bond yields and borrowing costs.

I will continue to monitor this and make adjustments in client portfolios as seems appropriate.

Glenn S. Rank, CIMA®

Certified Investment Management Analyst®

President