Bond yields were in flux in October, pricing in a more aggressive path of Fed rate hikes in the process. As a result, the broad market return was negative for the month as shown in the -0.43% result for the Bloomberg U.S. Intermediate Aggregate Bond Index. The world is in the middle of a transition away from crisis-induced easy monetary policy toward some semblance of normal, and all things considered, the bond market is behaving rather well.

With respect to the yield curve, short term maturities (less than one year) remain anchored near zero since the fed funds rate remains at the zero bound and likely will through at least mid-2022. The real action in October was in the two to tenyear part of the curve, where yields rose from 6 to 25 basis points even as yields fell on the thirty year bond. These rising yields were mostly a reaction to persistent inflation coupled with increasing evidence that the labor market is tighter than the Fed believed earlier this year. Both of these facts make an earlier “lift-off” by the Fed more likely, which is why two rate hikes next year are now reflected in market yields.

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“After rising for three straight months, bond yields declined a bit (9 to 12 basis points) in April. As in the prior months, most of the action involved the 5 year Treasury and longer points on the yield curve. The short end of the yield curve, from overnight rates to the 5 year, remains anchored by Fed policy which is expected to remain unchanged into next year or perhaps longer. The total return for the Bloomberg Barclays Intermediate Aggregate Bond Index was 0.52% for the month, which was the first positive result this year.”

Click here to read the full commentary.

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It is no secret that the federal government has been spending a lot of money during the past twelve months to combat a historic pandemic and the ensuing economic troubles from lost jobs and reduced consumer spending particularly in the service sector. All this support and years of low rates and supportive financial conditions—and the support of the Federal Reserve to not raise rates too quickly – has a lot of investors concerned about the potential for run away inflation in the years to come. Read the full article here.

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