Should You Worry About Rising Bond Yields?

10Y US Treasury Yield 4

2015 hasn’t been a great year for bonds. While US stocks have returned more than 4% since the start of the year and international stocks have done even better, US investment grade bonds are essentially flat. And in the last few months they’ve actually lost money as bond yields have risen (yields move in the opposite direction of prices, so bonds lose value when their yields rise). Is this the start of a surge in bond yields, or simply a short-term blip?

To answer that question, the first thing to note is that the recent rise in yields (at least for US bonds) hasn’t been especially dramatic. The yield on 10-year US government bonds has risen from below 1.7% at the start of February to over 2.2% this week. That increase pales in comparison to the jump from around 2% to around 4% in 2009 and the increase from 1.7% to around 3% in the summer of 2013.

But could the recent rise in yields just be the start of a larger trend? Unlike in 2009, when fears of a global financial collapse were abating, or 2013, when comments by Ben Bernanke sparked fears about the end of the Federal Reserve’s quantitative easing program, there’s no clear economic explanation for why bond yields have risen in recent months.

Government bond yields typically rise because of factors such as an improving economic outlook, higher expected inflation, and (in some cases) the Federal Reserve raising short-term interest rates. But economic statistics suggest that US economic growth has slowed, the inflation rate has remained low, and the Fed is no longer expected to start raising interest rates early this summer, as many economists expected at the start of the year.

The lack of a clear economic explanation suggests that the recent rise in bond yields is likely more of a short-term blip than the start of a larger trend. For investors who are concerned about a continued rise in yields, one way to reduce risk without decimating your asset allocation is to shift your bond holdings toward shorter-term bonds. But bond yields can stay low for a long time, and there’s no economic evidence that the era of very low bond yields has ended.