When it comes to fixed income, 2016 has been a tale of two halves.
For the first six months of the year, it was straight up for bonds―and straight down for interest rates, which move inversely with bond prices. Those first six months were characterized by a host of concerns: about China, Brexit and low oil prices.
Those worries—together with unprecedented monetary stimulus from the European Central Bank and the Bank of Japan—pushed yields on U.S. Treasurys to record lows, and yields on many bonds in Europe and Japan into negative territory. At one point this year, more than $13 trillion worth of bonds around the world were trading with negative yields.
But just when everyone began to think interest rates could only go down, the bond market reversed.
180 Degree Turn
Starting in July, interest rates started to tick higher slowly. Then in November, they exploded to the upside following the surprise victory of Donald Trump in the U.S. presidential election. Trump's policies of lower taxes and billions of dollars in infrastructure spending may translate into higher economic growth and higher inflation, two factors that tend to drive up interest rates.
Adding more fuel to the interest rate rise, this Wednesday the Federal Reserve hiked its benchmark overnight federal funds rate by 25 basis points―its second increase in the post-financial crisis era―and signaled that three more rate increases could be coming next year.
By the end of the day, the U.S. 10-year Treasury yield was trading as high as 2.59%, up substantially from its lows of 1.32% in July, and even up from where it started the year, at 2.27%.
U.S. 10-Year Treasury Yield