Rising Interest Rates Hold Back Bonds

In the US the rate of increase in interest rates picked up substantially following the presidential election

Dave Sekera, CFA 10 January, 2017 | 12:02PM

Long-term global interest rates bottomed out in July 2016 and continued on an upward trend throughout the fourth quarter. In fact, the yield curve in the United States has risen to levels higher than where the markets began last year. In the U.S., the rate of increase in interest rates picked up substantially following the presidential election.

The impetus for rising rates has been the market’s expectation that the economy is entering a reflationary environment based on renewed economic activity, which will be spurred by fiscal stimulus and tax reductions. In addition, oil prices and industrial commodities have not only stabilized but are also trending upward.

As investors bid up prices of risk assets and ratcheted up their expectations for economic activity and inflation to rebound, the desire for safe-haven assets such as U.S. Treasury bonds has dwindled. Since the election, Treasury yields have increased across the yield curve anywhere from 35 to 60 basis points, depending upon the maturity date.

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About Author

Dave Sekera, CFA  is a senior securities analyst with Morningstar.

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