The 10-year Treasury yield has risen from 2.0% last year to over 2.9% in 2018, causing many investors to announce the end of the 30-year bond bull market. With the U.S. economy gaining further stimulus from sweeping tax cuts and an expansionary budget, analysts fear this will finally promote inflationary pressures.
According to the U.S. Congressional Budget Office, the tax cuts are projected to increase the budget deficit from about 3.9% of GDP to about 6.1% in 2020. In addition, the Federal Reserve is cutting its balance sheet, allowing investors to assimilate approximately $1 trillion of Treasuries a year.
Nevertheless, there are still major factors subduing inflation, interest rates, and bond yields. One of the main factors is demographics. While life expectancies rise, the world is getting older and richer. Due to the fact that pensioners are not big spenders, nor risk takers, this increases the demand for safer government bonds, thus affecting the economy and curbing inflationary pressures.
Some analysts are worried that as pensioners grow even older, and start drawing down their savings, it will reverse the downward pressure on interest rates. This is surely to raise interest rates. However, most of these concerns are not an immediate issue for the following reasons:
The new demographic changes are more moderate than the shift of previous fifty years.
The rise in longevity is permanent and has spurred a lasting change in saving behavior and therefore interest rates were also affected.
“While bond yields might rise in the short term because of cyclical factors like inflation, faster economic growth, and higher debt issuance, the long-term outlook remains largely unchanged” said Keith Knutsson of Integrale Advisors.