economy, income, interest rates, retirement, risk management

Are Bond Yields Moving Higher?

On October 3rd, 2018 the 10-year yield moved dramatically higher increasing 3.3% in a single day. Pundits have listed many reasons for rates and bond yields to move higher… a strengthening economy, decreasing unemployment, rising oil prices signaling inflation, a Federal Reserve committed to further rate increases into 2019. (3)

These pressures had been building for some time and signaled a good economic environment.

However, there are a few factors that some view as critically important moving forward in deciding how much bond yields could move up as well as how quickly.

In 2018, one important pressure was the rising budget deficit due to the Tax Cut Bill of 2017. Because of the tax cuts the government has had to increase the issuance of debt. This increased supply of debt has pushed down the price of bonds and increased bond yields. Based on the current and foreseeable situation in Washington, DC this situation is not likely to improve causing sustained pressure driving long term bond yields higher. (4)

In October 2018, Carl Riccadonna, Chief US Economist for Bloomberg, indicated the following: “The bond slump likely also reflects the growing impact of the world’s major central banks stepping back from stimulus. The ECB this month cut monthly asset purchases in half, while the Fed balance sheet unwind continues. Meanwhile, resurgent commodity prices are raising the prospect of a fresh tailwind to inflation.” (1)

The withdrawal of major buyers like the ECB and Federal Reserve from the market leads lower bond prices and higher rates.

“This withdrawal of liquidity and gradual tightening of monetary policy” is reverberating across financial markets, Bob Baur, chief global economist at Principal Global Investors, said in a 2018 interview with Bloomberg Television. “We look for 10-year Treasury yields to hit 3.5 at some point — later this year, early next year — and I think that’s going to be a real problem for stock markets.” (1)

In fact, the equity markets suffered a sharp 20% pullback in December of 2018. Markets responded negatively to Fed plans to continue raising rates into 2019. Markets only stabilized in January 2019 when Chairman Powell committed the Fed to lower rates for longer and removed plans for rate increases. Through 2019 bond yields moved lower.

With 2020 and advent of COVID-19, the Fed and Congress acted to support the economy as it was closed down in the first quarter. More than $4 trillion in support was added, along with expanded purchasing of bonds by the Fed adding to their balance sheet.

With the innovative programs initiated by the Fed, bond yields and credit spreads have been artificially suppressed. Even the lowest credit quality companies that are still struggling due to COVIDs impact on the economy are receiving a great deal of attention from investors producing extraordinarily low yields.

This dynamic is unlikely to change in the coming months. The economy has weakened in December 2020 raising fears of a double dip recession.

The value of the 20-year treasury ETF (TLT) is down 8% from April highs (yields higher) in December of 2020, though it is up 17% YTD (yields lower).

But, as an investor or someone saving for retirement, what does this mean?

Many retirees and savors rely on bonds for stability in their portfolio and predictable income. An era of Quantitative Easing has artificially depressed bond yields and driven bonds to artificially inflated prices over the past 7 years.

Based on these assumptions alone it is clear that as we approach retirement, we need to identify strategies that will help us manage these risks in retirement. How can we keep up with inflation, make sure we don’t outlive our money, and create a guaranteed income stream?

For savers and retirees, a solution to these issues are annuities that provide guaranteed retirement income. These types of annuities create a lifetime guaranteed income stream while giving the investor the ability to stay invested in the market. If the market declines, they will continue to get their stream of income.

By contrast, someone invested in the market without such guarantees, drawing income and experiencing a down draft in the market they may find themselves running out of money during retirement.

This fear, running out of money during retirement, is people’s number one fear according to several recent studies.

If you feel uncomfortable investing in the market, please reach out to me to discuss options that can help you protect your lifestyle regardless of what happens in life. Contact me at james.cox@ffgadvisors.com

Retirement Income. Tax Efficient Planning.

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To learn more contact:
James Cox
Cell: 267 323 6936
Email: james.cox@FFGadvisors.com
First Financial Group 150 South Warner Rd.  Suite 120 King of Prussia, PA 19406

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This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 7101 Wisconsin Ave Suite 1200, Bethesda, MD 20814 301-907-9030 Securities products and advisory services offered through PAS, member FINRA, SIPC.  CA insurance license #0I64535. First Financial Group is not an affiliate or subsidiary of PAS or Guardian. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. 

2020-113813 exp 12/2022