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By Russ Koesterich, BlackRock’s Global Chief Investment Strategist

A reminder of the “low-for-long” environment

Stocks declined last week as economic data continued to come in mixed. The Dow Jones Industrial Average fell 1.21% to 18,011, the S&P 500 Index dropped 0.89% to 2,107, and the Nasdaq Composite Index slipped a more modest 0.37% to 5,070. But bond yields also fell, and prices rose, as inflation concerns lessened. The yield on the 10-year Treasury moved from 2.21% to 2.12%.

We still believe yields are likely to rise modestly by year’s end, but last week reminds us that we are in a “low-for-long” interest rate environment. And that means investors who are searching for income will continue to need to find alternative sources for that income.

Stocks slip as rates reverse

Despite another surge of acquisition deals last week—Charter Communications plans to buy Time Warner, while Avago is set to buy Broadcom in the largest semi-conductor deal ever—US stocks slipped as investors began to grudgingly accept the likelihood of an autumn increase in interest rates by the Federal Reserve (Fed).

European stocks also lost ground, but Japan bucked the trend, closing at a 15-year high. With US equity markets struggling to break out of their range, investors are increasing their non-US allocation. Last week, for example, investors withdrew $1.6bn from US large-cap exchange traded funds. The beneficiaries of this rotation were China and broad, non-US funds, which received inflows of $4.2bn and $1.5bn, respectively. As discussed in previous commentaries, we agree with the investor penchant for higher international exposure.

As stocks slipped, so did bond yields. Ten-year US Treasury yields hit a one-month low of 2.10%, but the trend was global: German Bund yields fell back below 0.50% and there were similar drops in UK and Australian yields.

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