{"id":12492,"date":"2023-09-27T20:00:00","date_gmt":"2023-09-28T00:00:00","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-us\/insights\/long-bonds-for-the-long-term-investor"},"modified":"2024-03-07T14:32:56","modified_gmt":"2024-03-07T19:32:56","slug":"long-bonds-for-the-long-term-investor","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-us\/insights\/long-bonds-for-the-long-term-investor","title":{"rendered":"Long bonds for the long-term investor"},"content":{"rendered":"\n

By Atul Bhatia, CFA<\/strong><\/p>\n\n\n\n

Recent fundamental data on the U.S. economy is mostly supportive for long-term bonds, in our view. Inflation is down from 2022 levels, consumer balance sheets are growing more fragile, and U.S. budget growth appears likely to slow, while the Federal Reserve has indicated that interest rates are unlikely to rise further and that price stability will take precedence over growth considerations when it comes to cutting. All in all, we believe the emerging picture of slower growth with an anti-inflation central bank should be good for government securities with long-term maturities. <\/p>\n\n\n\n

But markets have been marching to a different drummer, with yields on 30-year Treasuries rising sharply in September. While various theories have been put forward to explain the price move, we think the answer is a simple\u2014and, in our view, temporary\u2014lack of available risk appetite for longer government debt. <\/p>\n\n\n\n

For individual investors who are saving for their children\u2019s college or their own retirement, we believe today\u2019s fixed income opportunities should serve as a compelling reminder of the power of a long-term time horizon. <\/p>\n\n\n\n

The usual suspects<\/h2>\n\n\n\n

Before delving into our view of what is behind the recent price action, it\u2019s worth dealing with some of the other theories we\u2019ve heard. <\/p>\n\n\n\n

Higher inflation is frequently cited, but that explanation is inconsistent with other market signals. The Fed\u2019s preferred measure of medium-term inflation expectations has barely budged in September, with a trivial 10 basis point rise in the 5y5y inflation swap (a market-derived measure of annual expected inflation between 2028 and 2033). In addition, the market\u2019s direct projection of inflation over 30 years\u2014the yield differential between fixed-rate and inflation-adjusted government bonds\u2014has likewise moved only a fraction of the overall change in yields. We think it\u2019s hard to argue that markets are spooked by inflation while investors forego \u201ceasy money\u201d from inflation-linked investments. <\/p>\n\n\n\n

Another idea we hear floated is that default fears driven by rising U.S. debt levels are pushing investors out of longer bonds. But that view ignores both the strengthening dollar and still-high global stock prices. In addition, Japan\u2019s experience, with debt-to-GDP ratios routinely twice that of the U.S., is a contemporaneous counterexample of low bond yields and high debt. <\/p>\n\n\n\n

Bonds on both sides of Pacific ignore debt levels<\/h3>\n\n\n\n

Japan has a higher debt ratio and lower 30Y yield than the U.S.<\/h4>\n\n\n\n
\"Debt-to-GDP

Chart comparing debt-to-GDP ratios for the U.S. and Japan alongside 30yr bond yields for both countries since 2004. The chart shows that Japanese debt ratios have always been larger than the U.S. levels, while bond yields remain lower. The chart also shows that higher debt ratios have not been associated with higher bond yields on a consistent basis. <\/p>