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"Treasury bond yields are usually calculated by adding 3.00% to the rate of inflation. 3.00% is the cost a bank needs to cover overhead and return a profit. It is also the real rate of return that long term investors want as a real yield to insure portfolio growth.
If inflation is 2.5%, then the long bond yield should stay around 5.50%. However, yields are hovering closer to 5.00% than 5.50%. To me this means past core inflation may be 2.5%, but the market thinks future core inflation will only be 2.0%. So unless the core rate of inflation really takes off, bond rates should remain stable.
If the economy falters this fall and stocks plunge, then bond prices will rally further but it should be limited as the market already appears to have discounted the effects of this slowing." |
