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Bond Yields Below Fair Value

Our proprietary Treasury Note Yield Model is signaling that bond yields are too low and prices too high. The model discounts factors such as current yields, GDP growth and long-term inflation, as well as stock prices and earnings. We smooth trends over a five-year period in order to avoid being caught up in short-term momentum swings. Our current 10-year T-bond fair value yield is 3.25%. The normal valuation range has a floor of 1.97% and a ceiling of 4.52%. The current 10-year bond yield is 2.12%, above the valuation floor but still below fair value. From an asset allocation standpoint, we think bonds remain fully valued compared to stocks and recommend fixed-income securities account for a relatively low 25%-35% of diversified portfolios. Within fixed income, investors have options ranging from government to corporate to foreign to asset-backed securities, among others. We favor bond ETF AGG for the core of a fixed-income portion of a portfolio. We note corporate bond yields have not fallen as fast as government bond yields and spreads are wider than historical averages. In search of income, investors may also find that asset-backed or floating-rate securities can offer higher yields. ...  above the valuation floor but still below fair value. From an asset allocation standpoint, we think bonds remain fully valued compared to stocks and recommend fixed-income securities account for a relatively low 25%-35% of diversified portfolios. Within fixed income, investors have options ranging from government to corporate to foreign to asset-backed securities, among others. We favor bond ETF AGG for the core of a fixed-income portion of a portfolio. We note corporate bond yields have not fallen as fast as government bond yields and spreads are wider than historical averages. In search of income, investors may also find that asset-backed or floating-rate securities can offer higher yields.   more

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