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Much has been made regarding bond market performance in 2021. The rising rate environment has caused consternation for those concerned the selloff we’ve seen is poised to continue.
Largely a result of economic optimism, government bond yields around the world have risen as investors begin to price-in higher levels of economic growth and inflation in a post-pandemic world. Here in the U.S., another large fiscal stimulus package is set to be signed into law this week. Signs are emerging that pent-up demand for various services is large. The employment picture continues to improve. These factors have driven the yield on the closely watched 10yr Treasury Note to 1.60%, up from 0.91% to start the year. 30yr Treasury yields stand at 2.29%, up from 1.65%. Importantly, short-term rates, which are closely tied to Federal Reserve policy, have been quite steady. 2yr US Treasury yields currently yield 0.15%, up just 0.03% this year.
For bond investors, a rising rate environment can be frustrating to experience. As yields rise, bond prices fall, with longer bonds especially sensitive to this inverse relationship. In the short-term, this causes the total return on many bond portfolios to be negative. And while we understand that negative returns can be a cause for concern, there are many reasons for bond investors to be generally optimistic:
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Higher yields typically mean higher returns over the long-term
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Central banks are likely to remain highly accommodative, limiting the extent of the selloff
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The opportunity to harvest losses and generate tax-assets has improved
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Riskier sectors of the fixed income markets have performed well
We entered the year acknowledging that the bond market was quite rich and positioned portfolios accordingly. To date, the increase in rates has been a welcomed event as we are reinvesting interest payments and maturities into new bonds that have more attractive yields than just a few weeks ago. We are also encouraged that the increase in government bond yields hasn’t had a major impact on other sectors of the market such as munis and corporates. One tail risk we cited in our 2021 outlook was another “taper tantrum” scenario, where a rise in rates caused downside volatility in many asset classes. So, while we understand the immediate reaction to negative returns to be that of concern, remember that for investors with individual bond portfolios, higher rates are a welcomed sight.
Related: Munis Begin 2021 on a Positive Note
Source: Bloomberg as of March 8, 2021