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The Bond Who Cried Wolf

In the largest two-month move since 2013, the interest rate on the 10-Year U.S. Treasury Bond tagged 2.50% this week.  It is the 6th largest move higher of this magnitude in the last 20 years at 30%, yet few seem to be panicking.

After recovering from the taper tantrum in 2013, the change in interest rates has fixed income benchmarks off the April peaks ranging 1-4%.

Over the last few years, investors came around to the idea that bond yields should stay low because of variety of reasons, from lower structural growth to the deflationary aspect of technology and robotics.

Because of this complacency around interest rates, investors poured money into asset classes that pay high yields, such as dividend stocks, Master Limited Partnerships, and Real Estate Investment Trusts.  The latter of which, REITs, have a negative correlation of -0.9 to the 30-year bond yield over the last two plus years.  Should rates continue to rise, REIT shares are likely to remain under pressure.

In the past, each spike of interest rates led investors to become concerned about portfolio exposure to interest rates rising, but this time, so far, is different.  Anecdotally, advisors and the investment community are rather blasé about interest rates today.  Flows out of fixed income and investor sentiment does not seem overtly negative at this point.  Did the 10-year bond yield cry wolf one too many times?

This seems to be the case as the Federal Reserve governors and Chairwoman have made clear over the past several months that an interest rate hike will be coming.  While inflation data is low today, partially due to higher energy prices, the back part of 2015 could see inflation data trend higher, and with it, interest rates, which could surprise yield-oriented investors in the ‘safe’ part of portfolios.

This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

For more information, please contact Aurum Wealth Management Group at 440-605-1900 or visit our website at aurumwealth.com. To stay up to date with the latest investment-related news, follow us on Twitter @aurumwealth and sign up to receive our free newsletter.

 

Important Disclosure
This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.

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