Why are bond yields so low?

Question

Bold yields seem to be 1-2%. I read that in the 60s and 70s, 10% bonds were quite common. What is the reason behind this change?

In: Economics

Answer 1

Simplified. Bonds are loans. The yields on bonds tend to (not absolutely but more or less) follow interest rates. Interest rates (commercial rates) tend to follow the Fed rates. So in a low Fed rate regime (like now), the price of bonds tend to rise (ie lower yield) to track this.

Fed interest rates also tend to track inflation, ie Fed rates (nominal) are usually above the inflation rate. (eg if inflation is expected to be 3%, the Fed rate “should” be a few percent above that, say 5%)

In the 70’s and 80’s, inflation was very high (by current standards). So Fed rates were high and therefore commercial bonds had to offer even higher yields.