@BNP Paribas.
Surging inflation brought an end to the decade-long era of low bond yields. In the decade ahead, we believe bond yields will not return to the near-zero levels of the recent past or see the steady capital appreciation which marked the prior 30 years. Instead, our view is that inflation and real yields are more likely to remain closer to their long-term averages, supported by central bank policy, changing supply/demand dynamics, and the risk that inflation could spike again. Higher nominal and real yields should provide simpler and more secure solutions to investors’ fixed income needs, ushering in a new era of opportunities in the asset class.
In the summer of 2020, 10-year US government bonds offered yields of around 0.5%. By the autumn of 2023, they had surged to just under 5.0%.[1] In just three years, a decade’s worth of investor concern over cheap money, paltry yields, negative interest rates, and the inability of central banks to generate inflation had evaporated. Investor appetite for additional yield and thus the push to add increasing levels of credit or illiquidity risk to their portfolios also evaporated. The decade-long era of low bond yields was suddenly over.
Much has been written about the attractiveness of current bond yields and the potential for strong absolute returns as monetary policy becomes more accommodative. But relatively little has been written about the longer-term implications of the sudden lurch out of the low yield era.
Today’s US government bonds pay a positive real (inflation-adjusted) interest rate, have a more symmetric risk profile, and can play a wider range of roles and offer more opportunities in a diversified portfolio. Bonds are back, not just as a tactical investment in the coming quarters, but as a strategic opportunity for investors generally and – for the first time in a decade – with renewed purpose for a wide range of institutional investors needing income, duration, and diversity.
In the coming months, we will be taking a closer look at the implications of a new era for bonds through a series of in-depth articles. Here, we start by placing the end of the age of low yields in an historical context and providing broad guidance for managing bond exposure in the years ahead.
[1] St. Louis Fed. The 10-year US Treasury yield on 4 August 2011 was 0.52% and 4.98% on 8 October 2023. https://fred.stlouisfed.org/series/DGS10/
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