Analysis and Opinion »

Why are Yields So Low

David Becker
Share on StockTwits
Published on

Yields in the US have remained near their 2014 lows despite a robust rally in the stock market that has sent the Dow Industrial Average to all-time highs. In January the 10-year yield fell to the same levels but that was on the heels of the stocks market declining more than 6% in January, which showed that investors heavily weighted in stocks and needed to purchase bonds. The question for investors now is why are yield remaining stubbornly low?

When yields fell in January it was on the heels of a declining stock market, but also signs that first quarter growth could be less than expected. Indeed, GDP in the first quarter declined rapidly as the frigid weather crippled parts of the US economy especially construction and manufacturing.

Expectations at that time were for yields to climb, as the 10-year had tested the 3% level in late December and investors perceived a strong US economy would catapult yields to new highs. The lack of bond ownership at the time led to a robust rally in the 10-year bond, which pushed yields back to the 2.6% level.

The issue now seems to be that investors do not believe that the US economy is poised to grow from current levels at a rate that would increase yields back to 3%. Janet Yellen has also seemed to convince bond traders that yields will remain near historically low levels potentially beyond 2015, which has capped the rise in medium term yields. Bond were under owned in January and February, prior to the release of Aprils jobs report, there were many who were short bonds, which has helped cap the upward movements in bonds. Going forward data will likely drive yields, as investor look forward to this weeks retail sales report.

Share on StockTwits