Over the last three months, we have seen a flattening of the Treasury yield curve as short-term rates have risen and the yield on the 10‐year Treasury has declined. Historically, the flatter the yield curve gets, the more volatility bond investors can expect.
The Fed’s first rate hike, set to happen next year, in our experience may mean higher short‐term rates. Investors who have piled into short-term bond funds seeking safety may be at risk since rates have an inverse relationship to prices. If short term rates go up, history tells us short-term bond prices could go down.
We believe the treasury yield will continue to flatten, with short-term rates moving higher as long-term rates remain relatively stable. As such, tactical bond strategies may help to mitigate interest rate risk. Strategies that seek to remove interest rate risk may also help investors mitigate risk and exploit opportunities in the bond market.
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