That's left yields 0.8-2.6 basis points lower along the curve, paced lower by the long-bond
. The 2s-30s spread remains narrow near +60 bp.
While Gundlach isn't literally saying that fixed-income investors desire a dramatic turn in the economy, he's pointing out that the long-bond
market is warning the Federal Reserve that an increase in interest rates would likely lead to a sell-off in risk assets and a rally in safe-haven products.
The depressed level of long-bond
yields in the US reflects not so much expectations of muted US growth to come, but rather the deflationary forces at work in Europe impacting the US outlook.
Investors with a longer horizon of one-two years can look at long-bond
funds that offer high yields plus capital appreciation.
To that end, long-bond
rates have stayed relatively high in recent years, and that has helped individual disability insurers.
It is widely believed that the long-bond
rate contains information about expected future inflation rate.
AtlaLink is in the market with a long-bond
issue, aiming to raise around CAD125m.
Figure 2 shows where the improvements in matching the long-bond
forecasts come from.
yields in the major OECD countries are projected to rise still further, as central banks, led by the US Federal Reserve raise short-term interest rates, in order to check inflationary trends.
This could account for the puzzling ability of the term structure to predict the direction of short rates but not long-bond
returns mentioned above."
In this case, short-term bonds could be yielding, say, 5.8%, and the 30-year or "long-bond
" could be at 6%.
The only other exogenous shock series that had a major impact on long-bond
yields during this period is the shock to the change in sensitive materials prices.