In our last blog we shared an overview of our current thinking about the economy and the stock market this year. Here we will share our thoughts on the bond market. As always, please feel free to share your comments at the bottom of the page.
Vintage Bond – Background
Low Interest Rate Environment
The U.S. Federal Reserve raised interest rates for the first time in 10 years in December 2015 by one quarter point (0.25%). This was the first increase since June 2006. The historically-low interest rate environment over the last seven-plus years has created a demand for risk assets — one of the key drivers to the continued growth of equity markets.
The Federal Reserve has kept this low interest rate policy due to lower than expected U.S. inflation which has fluctuated between a calendar year low of 0.1% (2008) to as high as 3.0% (2011) through 2016. The Federal Reserve’s stated goal is to keep core inflation (based on Consumer Price Expenditures, CPE) above 2% annualized. Today the CPE is at 1.6% through the 12 months ended June 2016, so still under the Federal Reserve’s stated target.
Interest in Raising Interest Rates
The Fed’s interest in raising interest rates has been tempered by low inflation, a sluggish global economy, low oil prices, and by conflicts in a variety of both developed and emerging market economies. A strong dollar has also been a challenge for U.S. companies in terms of higher prices for U.S. exports.
The current 10-year Treasury yield has fallen from 2.27% at the beginning of 2016 to its current yield of about 1.56% and touched 1.36% in early July — a historic record low. Bell has lowered its expectation for an increase in interest rates and expects the 10-year treasury yield to remain in a range of 1.5% to 2.5% over the next 12 months.