The bond market has been a bit wonky over the last few weeks. The 10-year Treasury yield moved up from 1.93% to 2.28%, then down to 2.12%, and just today, back up to 2.28% (as of May 19, 2015). The 10-year Treasury yield hit 2.366% on May 12, its highest level since November 14, 2014. The bond market has been selling off on both good and bad economic data, which could represent either a short-term blip or the start of a long term trend.
Bond prices have fallen in the past few weeks as bond yields have surged higher on increasing optimism about prospects for global growth, stabilizing oil prices and growing expectations that the Federal Reserve will raise interest rates at year end. Another factor that could have contributed to falling prices is a lack of liquidity in the bond markets. Some investors believe bonds continue to be an attractive proposition, as slow growth and low inflation likely will prevent the yields from rising any further.
Pundits continue to speculate on whether rising yields represent the beginning of a new trend or a temporary blip. We don’t know which outcome will be correct, but rather than attempt to forecast the unknowable future, we instead focus on managing bond volatility with an eye toward reducing risk and seizing opportunities for increased returns.
The bond market’s recent volatility also reaffirms our belief in the value of actively managing bonds. We generally believe that active management remains a prudent strategy for fixed income investors, especially in the current environment, and that active management has the potential to achieve higher returns and greater diversification while providing the desired level of liquidity.
In the near term, we believe investors should expect more volatility as expectations about central bank policies evolve. We continue to suggest investors focus on managing interest rate, credit and liquidity risk in their fixed income portfolios.
Graph data sources: Bloomberg and www.treasury.gov