Why Have Bond Yields Stop Rising? A Mystery It’s Not

Economic momentum is waning, holding bonds back

   

“Why isn’t the 10-year Treasury yield over 3%?” the grand inquisitors on CBNC demanded to know.  They got various answers, all more or less plausible.  But the most compelling answer is the one nobody gave.

Sure, it’s true, as one institutional strategist argued, that the Federal Reserve’s zero-yield policy at the short end of the curve is depressing interest rates at all maturities, including the longest-dated bonds.  However, zero-yielding money markets don’t explain why bond yields soared in the May to September period last year.

The simple reason why bond yields have stopped rising now is that the velocity of economic growth has, once again, peaked.  At the very same time the unnamed strategist (and countless others) are shouting that the economy is about to zoom ahead, growth is starting to cool.

How do I know?  The strangely quiet stock market since January 1 offers the first clue.  Soft oil prices (despite today’s modest rally) during the opening weeks of the New Year add another vote to slowdown case.  To say nothing of the action in the bond market itself, where yields have worked steadily lower since the turn of the year (to 2.83% on the benchmark 10-year Treasury today).

In short, as I’ve said before, the real-time market signals give little support to the “runaway locomotive” view of the economy.  Hang on to your bonds and preferred stocks, and keep buying undervalued fixed-income sectors, such as emerging markets.

Over in the stock market, I continue to find good value in the telecom area.  Verizon (VZ) brought in a solid Q4 earnings report today, with sales and profits edging out Wall Street estimates.

Nonetheless, some investors quibbled that the company signed up fewer customers than last year for TV and broadband internet (Verizon’s FiOS service).  Hairsplitting of this sort is what creates buying opportunities.

P.S.  Heartwarming Q4 report from food-and-soaps maker Unilever (UL).  Under CEO Paul Polman, an ex-Nestle (NSRGF) star, UL continues to surprise analysts on both sides of the Atlantic with the company’s strong performance in emerging markets.  “Underlying” sales in these markets, after stripping out one-time events like currency fluctuations, rose a smart 8.7% in 2013.


Article printed from InvestorPlace Media, http://investorplace.com/2014/01/bond-yields-federal-reserve/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.