Sep 1, 2020 - Economy

The bond market's tug of war

Investors bought the dip in U.S. Treasuries on Monday following a significant move higher in yields on longer-dated maturities after the Fed's Jackson Hole symposium last week. Investors especially bought the 30-year bond, which saw yields rise to the highest level since mid-June on Friday.

Why it matters: A tug of war is developing in the bond market as inflation expectations are rising thanks to unprecedented central bank and government stimulus measures globally.

  • But central banks also are buying bonds, bidding prices up and keeping yields down.

Between the lines: Central bank support has pushed real yields on some investment-grade corporate bonds into negative territory as prices continue to decline and inflation expectations rise, per the Financial Times.

  • Investment-grade corporate bonds with maturities between one and three years posted negative real yields for the first time since March 2017, and bonds with maturities between five and seven years saw their real yields turn negative this month for the first time since 2013.

Yes, but: Real yields subtract inflation expectations from a bond's nominal yield, meaning investors are buying the bonds almost entirely on the expectation that they will rise in price. It suggests the bonds are seen more as a speculative asset than a safe store of value that will provide stable income.

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