Many market watchers have been waiting for an increase in yields (and a corresponding drop in prices), but that has yet to materialise.
One of the main reasons is that the so-called great rotation of asset flows out of bonds and into stocks has not occurred. Stock funds have been seeing some significant inflows, but so too have bond funds, indicating that the money flowing into the market has been coming from cash holdings.
Several important structural factors are also keeping a lid on yields. Most importantly, the Federal Reserve is still purchasing treasuries and is likely to continue to do so through at least the middle of this year. Even when the Fed does decide to end its bond-purchase program, it is likely to do so gradually rather than suddenly.
Additionally, we continue to see a lack of new supply in many other areas of the bond market. With the Fed being such a major purchaser of new bond issues, there is simply not a great deal of new supply for the market to absorb, which is also acting to keep yields down.
Over the long term, we still expect rates to rise and we would stick with a year-end forecast of between 2.25% and 2.5% for the ten-year treasury. Any such increase, however, is likely to be slow and erratic.
From an investment perspective, we still believe treasuries look unattractive and would suggest a focus on credit sectors of the fixed income market, including high yield, bank loans and emerging markets debt.
