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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. Our model discounts factors such as current yields, GDP growth and long-term inflation, as well as stock prices and earnings. We smooth trends out over a five-year period, in order to avoid short-term momentum swings. Our current 10-year T-bond fair value yield is 3.46%. The normal valuation range has a floor of 2.2% and a ceiling of 4.7%. The current 10-year bond yield is around 1.75%, below the fundamental valuation floor and far 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 U.S. Treasuries for the core of a portfolio. In the wake of a recent widening in credit spreads, we now see value in high-rated Corporates as well as asset-backed securities. We would avoid foreign-government fixed-income securities, many of which now carry negative yields. ...  fundamental valuation floor and far 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 U.S. Treasuries for the core of a portfolio. In the wake of a recent widening in credit spreads, we now see value in high-rated Corporates as well as asset-backed securities. We would avoid foreign-government fixed-income securities, many of which now carry negative yields.   more

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