The scenario: The US 10 Year Treasury yield has moved below its one year high. President Trump has been in office now for a few weeks and has written a slew of executive orders intending to put U.S. interests first.
The expectation: Less regulation, tax cuts, increased infrastructure spending, changes in trade policy and any other pro-business promises may help boost GDP growth.
The concern: Inflation and interest rate hikes. The Trump administration has seen a lot of pushback in policy creation and if he loses support of his own party, could rates remain low for longer if economic growth is below current expectation?
Corporate Bonds & US Treasury 10 Year Yield
(2/10/12 - 2/10/17)
The silver lining:
As rate hikes seem imminent, it’s important to remember there are a few forces that can prevent bond yields from rising too fast. Telegraphing rate hikes is a tool that the Fed can use to lessen the burden of the hikes; balancing a possibly unstable market should the Fed be forced to increase rates dramatically. Foreign buyers seeking yield and safety may buy US bonds, since many overseas sovereign bond yields are still at near zero levels. This foreign demand keeps upward pressure on prices and downward pressure on yields.
Is waiting to see which direction interest rates move worth the wait? We think …
- Bonds are most often bought for yield, not for price
- Time is money. It can be very difficult to recoup the income sacrificed while sitting on the sidelines, even when an interest rate guess proves accurate
- Corporations’ expense obligations must be met regardless of the interest rate environment and is not dictated by credit market swings
- Bond allocations diversify and steady investment portfolios during periods of economic and financial distress and uncertainty
What are your unique investment needs? If income is a need, our conservative approach to generating current income may be what you are looking for.
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