Treasury yields hit one-month high, but could still be constrained

Yields on 10-year Treasurys have trended higher through February, creeping past 2% on Feb. 10. This has led investors to ask if yields will move up from here in a meaningful way. We believe the likely answer is no, especially when you look at Treasurys in relation to government debt around the world. With international debt trading at very low yields, there will quite possibly be a point at which U.S. Treasurys look too attractive to ignore — and investors will bid them up again.

Sure, there are other inputs that might affect Treasury yields. Federal Reserve expectations and worries about reflation are among them. When it comes to Fed expectations, it’s important to remember that Fed officials have not issued hard-and-fast guidance about the timing of rate hikes. Fed bankers are looking at a number of inputs to guide policy decisions, and Treasury yields are only one factor. Reflation, meanwhile, is a threat that we believe is being overplayed. Consider, for example, that all G-10 countries have lowered their inflation forecasts, and prices in many regions of the world are facing considerable pressure from various sources. With these thoughts in mind, we believe it makes sense to step back and temper any expectations of a sustained, runaway rise in interest rates.

The views expressed represent the Manager’s assessment of the market environment as of February 2015, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.

Investing involves risk, including the possible loss of principal.

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