While 2-year government bond yields have jumped in Italy, Spain and the United States in 2018, longer duration bonds have been largely unaffected by the recent volatility. Short-term yields are typically driven by political machinations and central bank jawboning, while the market sets the long-term rate. The recent political fuss emanating from certain southern Eurozone countries has spiked bond market volatility and caused a certain amount of angst amongst the fixed income trading community. However, the longer end of the market has barely moved. We are paying attention to market developments as they unfold, but continue to hold the view that long duration bonds will provide portfolio diversification and a positive return during the next time down for the stock market.
Rising short-term bond yields and stable or falling longer-term bond yields simply means the yield curve is inverting and signalling the next recession is approaching.
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