MT4.com Daily Spotlight: Bond Yields Still Low on Value Model
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Daily Spotlight: Bond Yields Still Low on Value Model
Daily Spotlight: Bond Yields Still Low on Value Model
Info Sources: www.mt4.com   |  
Our proprietary Treasury Bond Yield Model is signaling that bond yields are still too low (despite the recent move higher) based on the investment fundamentals. Our model takes into account factors such as current yields, GDP growth, long-term inflation, stock prices, and earnings, in order to make an asset-allocation recommendation between stocks and bonds. We smooth trends out over a five-year period to avoid short-term momentum swings. Our current 10-year T-bond fair value yield is 4.0%. The normal valuation range has a floor of 2.8% and a ceiling of 5.3%. The current 10-year bond yield is around 1.75%, below the low end of the fundamental range and about 55% below fair value. Why is this the case, especially given recent GDP growth and inflation trends (not to mention aggressive fiscal stimulus spending from Washington during the pandemic)? In our view, low U.S. yields more likely reflect technical factors such as heavy buying from overseas investors seeking safety (or at least, yields that are not below zero), rather than the economic fundamentals. From an asset-allocation standpoint, we think bonds remain fully valued compared to stocks and recommend that long-term investors modestly favor equities in their diversified portfolios.

Our proprietary Treasury Bond Yield Model is signaling that bond yields are still too low (despite the recent move higher) based on the investment fundamentals. Our model takes into account factors such as current yields, GDP growth, long-term inflation, stock prices, and earnings, in order to make an asset-allocation recommendation between stocks and bonds. We smooth trends out over a five-year period to avoid short-term momentum swings. Our current 10-year T-bond fair value yield is 4.0%. The normal valuation range has a floor of 2.8% and a ceiling of 5.3%. The current 10-year bond yield is around 1.75%, below the low end of the fundamental range and about 55% below fair value. Why is this the case, especially given recent GDP growth and inflation trends (not to mention aggressive fiscal stimulus spending from Washington during the pandemic)? In our view, low U.S. yields more likely reflect technical factors such as heavy buying from overseas investors seeking safety (or at least, yields that are not below zero), rather than the economic fundamentals. From an asset-allocation standpoint, we think bonds remain fully valued compared to stocks and recommend that long-term investors modestly favor equities in their diversified portfolios.

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