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Bond Market Turmoil: Yields Hit Fresh Highs in June



With some of the classic safe havens currently providing little protection, Russ shares two stock sectors to consider as rates drift higher.

Despite multiple signs that global growth remains sluggish, bond yields recently hit fresh highs for the year. The yield on the 10-year Treasury rose sharply last week from 2.12% to 2.4%, as prices correspondingly fell, and U.S. real yields are now up by more than 50 basis points since mid-April.

Bond yields’ recent ascent is partly due to expectations for a Federal Reserve (or Fed) interest rate liftoff shifting to September. Technical factors and the selling of European debt are also to blame.

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Market Realist – Bond market turmoil (BND) has been building up steam over the past month, and the gyrations continued to plague the markets well into this week. Bonds (AGG), largely considered to be safe-haven assets, tend to do well in periods of sticky global growth (ACWI). However, bond prices have been in a crazy tailspin lately, causing a subsequent rise in yields. Note that bond prices and yields have a negative relationship. That is, a fall in prices causes a rise in yields and vice versa.

The above graph shows how the U.S. Treasury yield curve has seen a sharp upward move since mid-April. Ten-year Treasury yields (IEF) have seen an increase of 59 basis points from April 15, 2015, to June 10, 2015. Thirty-year Treasury yields (TLT) rose from 67 basis points over that period. Shorter-term bonds ranging from maturities of one to three years (SHY) have seen a rise in yields of almost 30 basis points, a significant jump.

On June 10, 2015, ten-year German (EWG) government bond yields increased to more than 1% for the first time since September 2014. The bond hit an intra-day peak of 1.058% before closing the day at 0.978%. The yields had been flirting with near-zero levels in April.

In this series, we’ll explore the reasons behind the recent surge in yields. We’ll look at whether the impending rate hike could mean a taper tantrum for the markets, and we’ll explore opportunities to consider in a rising-yield environment.


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