facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Yields Defy Inflation Expectations

Global uncertainty has dominated the direction of long-term interest rates recently.

Nominal Treasury yields have converged with breakeven rates, or market expectations for inflation (calculated from Treasury Inflation-Protected Securities yields). As shown in the LPL Chart of the Day, the difference between the 10-year Treasury yield and 10-year breakeven rate has fallen to the smallest spread in 16 months, hinting that bond investors may be underpricing the future pace of inflation.

“The disconnect between interest rates and inflation expectations is another sign to us that yields are too pessimistic for U.S. fundamentals,” said LPL Research Chief Investment Strategist John Lynch. “Fixed income investors globally have relied on U.S. debt this year for safety, yield, and liquidity.”

Recent economic reports support our perspective of moderate inflation. In April, the core Consumer Price Index (excluding food and energy prices) rose 2.1% year over year in April, while core personal consumption expenditures climbed 1.6% year over year in March. Consumer price growth has slowed, but neither gauge is at a worrisome level. Wages have also grown at a 3% year-over-year clip for the past several months.

At the same time, it’s tough to predict what will push the 10-year yield up in the near term. Global rates continue to slide amid trade and political uncertainty worldwide. U.S.-China trade tensions have escalated over the past two weeks, and a deal may not be as close as investors previously thought.

Still, we believe yields will ultimately respond to improving growth expectations and slightly higher inflation. A resolution in the U.S.-China trade dispute and stabilization in global markets could help ease buying in Treasuries and make way for the 10-year Treasury yield to potentially make a run at 3% by year end.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured.  These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency.  The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.


For Public Use | Tracking # 1-855306 (Exp. 05/20)