This article was written by Invesco PowerShares Director of Fixed Income Product Strategy Scott Eldridge.
Interest rates have been on the march since late January, thanks largely to global rate markets and a looming US Federal Reserve. In general, bonds are vulnerable to falling market prices as a result of higher rates, but there are income investments that can be used to take advantage of, rather than fall victim to, rising rates. They’re known as floating rate instruments.
What’s happening with interest rates?
The 10-year US Treasury yield rose 0.68% from Jan. 30 through May 11.1 Two key variables are combining to push rates higher:
1. Global relative value – Last year, interest rates in Europe crashed toward — and in some cases through — zero. This came largely as a result of the European Central Bank (ECB) embarking on its version of quantitative easing. Very low rates around the world made US Treasuries look cheap by comparison, and created an anchor on how far US rates might rise. But that anchor has become dislodged.
In recent weeks we have seen rates across Europe spike, as seen in the chart below. There are no clear indications (at least to this writer) as to why we have seen the sudden about face in Europe. My best guess: a slightly positive turn for economic optimism in Europe has the very crowded “Follow QE, go long euro debt” trade spooked. We may be seeing the unintended consequences that unprecedented central bank policy may have on rate volatility.