With all the election chatter and stock market volatility, it may have been easy to miss the ongoing uptrend in long-term interest rates.
The yield on the 10-year Treasury bond is sitting just below 1%. Just a few short months ago, the 10-year was yielding roughly 0.5%.1
What’s fueling the rally? More demand for money, which is the result of a pickup in economic activity. When businesses see economic conditions improving, they look to expand their operations. When entrepreneurs see exciting new opportunities, they look to raise money to finance their projects.2
By contrast, a weaker economy tends to promote a “flight to quality,” which increases the demand for treasuries and drives yields lower.3
Will interest rates continue to go higher? That’s uncertain. Rates fluctuate, and there’s a possibility that long-term interest rates may reverse course and start to trend lower. A lot will depend on business confidence in the months ahead.
With interest rates ticking higher, some people may wonder if it’s an opportunity to boost bonds’ exposure to capture the higher rates. It’s a good thought, but you can consider many factors before boosting the bond portion of an allocation model, including the outlook for inflation, the dollar, and other macroeconomic factors.
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The Federal Open Market Committee (FOMC) increased the target rate by 75 basis points (bp) to a 3.25% upper bound and delivered a more pessimistic outlook in their published Summary of Economic Projections.
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