At the end of last week, investors returned to the U.S. bond market, sending bond prices higher and yields lower. On Friday afternoon, the benchmark 10-year Treasury bond was trading with a yield of 1.56%. That’s a significant change from a week earlier when the 10-year Treasury bond was trading with a yield of 1.7%.
While a week of data isn’t enough to confirm a trend, lower bond yields may come as a surprise to fixed-income analysts. Bond yields usually move in tandem with inflation, as bond investors demand higher returns to compensate for their money’s loss of purchasing power. So, what brings investors back to bonds? (See Insiders’ Hot Stocks on TipRanks)
Inflation Debate Shifts Gears
For weeks the inflation debate was one-sided, with most market observers seeing inflation spinning out of control. For instance, the co-founder and CEO of Twitter (TWTR) and the founder and CEO of Square (SQ) argued that the U.S. economy is heading to “hyperinflation.”
Last week, the debate shifted gears with Ark Investment Management founder Cathie Wood arguing that the U.S. is heading in the other direction to disinflation, or deflation. That’s good for bonds.
Markets are Warming to Tapering
Meanwhile, markets have begun to warm up to tapering, the rolling back of Fed’s bond-buying program.
They see it as the Federal Reserve’s way to cool off the economy, and eventually bring inflation under control. That’s good for bonds with a longer maturity.
High Savings
For years U.S. savings have been meager, as American households have a high propensity to consume. The pandemic changed that.
According to a study featured by the Kansas Fed, U.S. savings rates soared during the pandemic due to lockdowns that prevented people from spending money on discretionary items like eating out and traveling.
U.S. savings as a percentage of disposable personal income rose from 7.2% in December 2019 to 33.7% in April 2020. Apparently, some of these savings have made their way to U.S. Treasury bonds, helping to keep yields low.
Bond Yields Still Low in Europe, Japan
Meanwhile, U.S. Treasury bonds continue to enjoy strong demand from overseas investors, as bond yields in Germany and Japan hover around the zero mark. That makes the current 1.57% yield of the U.S. 10-year Treasury bond look like a bargain.
Bottom Line
As long as U.S. savings remain high and bond yields remain low in Europe and Japan, U.S. Treasury bonds will continue to be a good investment for conservative investors.
Disclosure: At the time of publication, Panos Mourdoukoutas owned shares of Twitter and Square.
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