November 13, 2020 | By Hank Cunningham
We believe that the recent uptick in nominal bond yields will continue. This is despite no upward trend in inflation expectations. The corollary, as seen in the chart above, is for real bond yields to become less negative and to continue to trend towards zero. This is highly dependent on the recovery continuing to surprise on the upside. The prospects for another dramatic round of fiscal stimulus are uncertain but the recent developments in COVID-19 vaccines have brightened the economic outlook.
Thus, government bonds look expensive at today’s levels. With real yields likely to keep trending towards positive territory and inflation expectations flat, nominal yields should rise with the bellwether ten-year U.S. note moving up past 1% in the near term and possibly reaching 1.25%; the yield curve will likely steepen further. Corporate bonds, particularly those with maturities less than five years, should continue to produce positive returns.