The 3% Yield That Really Matters

Key points We see higher short-term U.S. rates having a profound impact: Investors can now earn returns in excess of inflation while taking on much less risk. The U.S. 10-year Treasury yield hit a four-year high of 3%. U.S. stocks slid despite strong earnings reports, but recovered later in the week. We expect a solid U.S. employment report this week. The Federal Reserve is expected to deliver an upbeat message on the economy. The 10-year U.S. Treasury yield touched 3% last week for the first time in more than four years - inciting much hand-wringing. Yet this overshadowed a similar milestone that we believe is of far greater significance to investors: Yields on short-term U.S. investment grade (IG) corporate bonds also hit 3% - an eight-year high.

Rock-bottom short-term interest rates over the past decade have driven income-hungry investors to riskier assets in search of higher yields. The chart above shows that yields on short-term IG corporate bonds have mostly languished below 2% since 2010 while two-year Treasury yields have hobbled below 1%. Yields on both have increased this year, with the corporate bond yield breaking above 3% and Treasury yield rising to just shy of 2.5%.
Investors can earn positive after-inflation returns from these bonds for the first time since the global financial crisis. To be sure, rates are much lower in developed markets outside the U.S. Yet greater competition for capital from U.S. shorter-duration bonds has implications across asset... Read more