Real yields are an important barometer of monetary conditions within the economy. Chief Investment Strategist John Lynch explains, “Indications of higher levels of growth led to a sharp rise in real yields (yields adjusted for inflation) in early 2018. While real yields have rolled over recently, they continue to be a solid gauge of the true borrowing costs for companies, with significant implications for the direction of stock and bond markets alike.”
Rising real yields can lead to higher borrowing costs and tighter financial conditions, which can be a headwind for risk assets. However, over the past two months real yields have slowly moved lower after spiking earlier this year, a welcome development for equity markets.
As our Chart of the Day shows, short-term real yields have risen faster than long-term, leading to a convergence of various maturities. One of the implications of this has been a flattening of the yield curve. Year to date and throughout 2017, the Treasury yield curve has been flattening. An inverted yield curve has historically been a consistent precursor to economic recessions; though as we discussed in a recent blog post, we don’t believe an inversion is imminent. Furthermore, the lag time between when the yield curve inverts and the economy enters a recession has averaged nearly two years over the last five economic cycles. For more on real yields, please see this week’s Bond Market Perspectives. Our Weekly Economic Commentary also gives more details on our views on inflation, a key input to calculating real yields.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
For Public Use — Tracking #1-721308 (Exp. 04/19)