Real Yields Pull Back as Investors Rethink Growth Prospects
July 23 2017 - 8:29AM
Dow Jones News
By Min Zeng
Inflation-adjusted bond yields are falling again, highlighting
investors' doubts about the U.S. economy's growth prospects.
The yield on the 10-year Treasury inflation-protected security,
or TIPS, pulled back to 0.483% Friday, down from 0.530% Thursday
and a recent high of 0.646% on July 7. Yields fall when bond prices
rise.
The 10-year TIPS yield is one popular measure of so-called real
yields, or the yield on the benchmark 10-year Treasury note minus
the rate of inflation.
Real yields are important because they reflect investors' actual
purchasing power from their bond investments.
At the moment, lower real yields reflect several factors,
including a run of underwhelming economic data and the unraveling
of postelection bets that Trump administration policies would boost
growth and inflation.
One concern for investors is that a rise in real yields would
raise borrowing costs, increasing the debt burden of consumers and
businesses. That could further crimp the prospects for economic
growth, which could make major central banks cautious in shifting
toward reduced monetary stimulus.
ECB President Mario Draghi on June 27 signaled that the central
bank might start winding down its bond buying program as the
eurozone's economy improves, which kick-started a selloff in the
global government bond market. But on Thursday, Mr. Draghi appeared
to be less hawkish, signaling instead that inflation isn't showing
convincing signs of picking up.
After initially dismissing signs of tepid inflation as
transitory, Federal Reserve Chairwoman Janet Yellen said in
congressional testimony earlier this month that the central bank
could reassess its pace of interest rate increases if inflation
remains stuck below its 2% annual target.
"Lower real yields, if sustained, imply lower growth potential
for an economy," said Donald Ellenberger, head of multisector
strategies at Federated Investors. "The hopes of fiscal stimulus in
2017 are becoming more remote, inflation is moving away from the
Fed's 2% target, and Yellen told us earlier this month that the
Fed's policy rate wasn't too far away from neutral."
Long-term borrowing costs retreated as bond yields declined. The
yield on the 30-year fixed rate mortgage average fell to 3.96% for
the week that ended Thursday, from 4.03% a week earlier, according
to data from Federal Reserve Bank of St. Louis.
The moves in real yields have coincided with swings in other
interest-rate sensitive investments. As real yields rose during the
recent selloff, prices of gold and silver fell. A rise in real
yields increases the relative attractiveness of bonds over the
metals, which don't offer regular interest payments. Metal prices
have risen in recent sessions as real yields have slipped.
Meanwhile, the average yield on U.S. junk bonds also ticked up
as real yields climbed, and retreated as bonds rallied recently.
U.S. bond funds and exchange-traded funds focusing on U.S. junk
bonds have suffered weekly net outflows in four of the past five
weeks, according to data from fund tracker Lipper.
Some investors don't expect a big selloff in the junk bond
market.
"We are moving away from extremely accommodative monetary
policy," said Ron Sanchez, chief investment officer at Fiduciary
Trust Co. International. "The regime change may generate
volatility, but I don't think this would cause a big correction in
stocks or junk bonds."
Write to Min Zeng at min.zeng@wsj.com
(END) Dow Jones Newswires
July 23, 2017 09:14 ET (13:14 GMT)
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