Will US Bond Yields Continue to Rise?

Morningstar Investment Management's Mark Preskett says that US government bond yields have doubled - and Treasuries now look like an attractive investment

Mark Preskett 25 January, 2018 | 7:40AM
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Mark Preskett: We are now three weeks into 2018 and already we’re seeing some significant moves in financial markets, not least with US Government bonds.

The 10-year US Treasury is now yielding 2.65% which is around half a percentage point higher than yields of September last year and almost double the 1.36% low reached shortly after the Brexit referendum.

Can we expect further rises? Perhaps, although factors that have kept bond yields low since the global financial crisis like low inflation expectations, aging populations, and overseas QE have not simply disappeared in 2018.

For a UK investor, the 2.65% yield represents a significant pick-up from the 1.4% we currently receive from buying a 10 year gilt. And in our portfolios, we have been actively taking exposure in US Treasuries via a Vanguard tracker.

It should be noted that the yield premium is lost if you account for the cost of hedging out the US dollar risk, but, in our view, the investment still makes sense from a risk-reward basis.

Investing in US Treasuries with a higher starting yield provides lower risk of capital losses from further rises in yields, should they come, and also greater opportunity for capital gains should markets begin pricing in recession/deflation.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Mark Preskett  is a Senior Investment Consultant & Portfolio Manager for Morningstar UK                       

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