Why low Treasury yields have led to inflated asset prices
Investing in volatility: The last cheap asset class (Part 2 of 6)
With cash paying nothing and long-dated bonds barely keeping up with inflation, investors have bid up risky assets from high yield debt (HYG) to frontier market equities (FM) in search of a decent return. In the process, they have left few bargains behind.
Market Realist – Treasury yields are currently very low
The graph above shows year-over-year inflation rates based on the consumer price index (or CPI) as well as one-year US Treasury yield and ten-year US Treasury (IEF) yields.
One-year Treasuries are offering only 0.1%, whereas ten-year Treasuries are yielding only 2.3%. This is slightly above the inflation rate, which currently is 1.7%. The latter is only just compensating its investors for inflation.
Treasuries (TLT) aren’t the only expensive asset. US equities (SPY)(IVV) are also starting to look expensive—although robust corporate earnings and good gross domestic product (or GDP) growth have justified high valuations to an extent.
If inflation picks up, the Fed will hike rates to rein it in. This move would lead to Treasury yields increasing, which could cause Treasuries to underperform.
Check out the next part of this series to see why you should consider holding volatility index funds, which are relatively cheap at the moment.
Browse this series on Market Realist:
