The real rate of return on a bond is calculated by subtracting the most recent inflation rate, such as the Consumer Price Index (CPI), from the bond's current yield. The higher the real rate the better. 

As of the close of 4/6/21, the yield on the benchmark 10-year T-note was 1.66% (1.7% rounded), matching the 1.7% trailing 12-month rate on the CPI in February 2021 (most recent rate available). That equates to a real rate of 0.0%, which is not attractive, in our opinion.  

At a base level, in order to maintain one's purchasing power, bond investors have sought to generate a yield that at least outpaces the rate of inflation.

For comparative purposes, from 4/6/91 through 4/6/21 (30 years), the average yield on the 10-year T-note was 4.2% (rounded), while the average rate on the CPI stood at 2.3% from 2/28/91 through 2/28/21, according to Bloomberg. Those figures translate into an average real rate of return of 1.9%, far more attractive than currently available. 

In September 2020, the Federal Reserve ("Fed") stated that it expects to hold short-term interest rates near zero until two things happen: (1) the U.S. unemployment rate is back to normal (around a 4.0% unemployment rate), and (2) inflation is running at or above 2.0%. The Fed has remained steadfast in its guidance despite the 115 basis point surge in the yield on the 10-year T-note since 8/4/20 (all-time low of 0.51%).

Fed Chairman Jerome Powell commented on 3/24/21 that he is not concerned about the rise in bond yields because he believes it reflects growing optimism about the economy's prospects, according to The Wall Street Journal. 

The yield on the 10-year Treasury note (T-note) closed at an all-time low of 0.51% on 8/4/20, according to Bloomberg.  

From 8/4/20 through 3/31/21, its yield rose from 0.51% to 1.74%, or an increase of 123 basis points.  

As indicated in the chart above, all of the flat to negative total returns belong to high-grade debt categories. 

Since 8/4/20, investors have favored speculative-grade bonds over investment-grade debt, as evidenced by the strong total returns posted by leverage loans (senior loans) and high yield corporate bonds. 

While emerging market bonds delivered a positive total return, intermediate-term global government bonds did not. The U.S 

One of the most common questions we field on an ongoing basis is the following: What are your favorite sectors?

Sometimes the answer is more evident than at other times, in our opinion.

You didn't need much of a crystal ball to tout Information Technology in 1998 and 1999 (top-performing S&P 500 sector both years by a wide margin), as was the case with Energy in 2004 & 2005, according to performance data from Bloomberg.

For the first time since 2005, a sector in the S&P 500 Index was able to repeat as the top-performer on a calendar year basis. Information Technology posted the highest total return in 2019 (+50.29%) and 2020 (43.89%), according to Bloomberg.

The top-performing sectors in Q1'21 were as follows (total returns): 30.84% (Energy), 15.90% (Financials) and 11.41% (Industrials). The total return on the S&P 500 Index was 6.17%. The other eight sectors generated total returns ranging from 1.15% (Consumer Staples) to 9.08% (Materials).

The U.S. economy is strengthening thanks in large part to the trillions of dollars of stimulus brought to bear by the federal government. It has changed the dynamic in the stock market. Investor sentiment has shifted away from growth stocks in favor of value-style sectors that currently tend to be more cyclical in nature. As a result, the cyclicals have rallied significantly over the past two quarters, and the top-performing sectors have remained the same (see chart).

Click here to access the post featuring the top-performing sectors in Q2'19, Q3'19, Q4'19 and Q1'20.

We get asked from time to time what our take is on the U.S. dollar and where we think it may be headed next. 

The dollar is still regarded as the world's primary reserve currency. Its relative strength over time can be influenced by such things as central bank monetary policy, geopolitics and trade. 

U.S. investors with exposure to foreign securities, commodities and the stocks of U.S. multinational companies are particularly vulnerable to fluctuations in the U.S. dollar. 

Predicting the direction of the dollar, or any currency, can be a daunting task, even for professionals who specialize in it. One thing we can provide is some context. 

As indicated in the chart above, as of 3/26/21, the 10-, 20- and 30-year averages for the U.S. Dollar Index carried readings from 89.75 to 91.25, which is a relatively tight range over a span of 30 years. 

To add some additional context, over the past 30 years, the index peaked at a reading of 120.90 on 7/5/01, while hitting a period-low of 71.33 on 4/22/08, according to Bloomberg.

The U.S. Dollar Index has strengthened in recent weeks largely due to the relatively quick rise in the yield on the U.S. 10-year Treasury note (T-note), according to S&P Global Market Intelligence. The yield on the 10-year T-note rose 61 basis points from 1.07% on 1/29/21 to 1.68% on 3/26/21, a potential signal that investors are becoming more optimistic about the prospects for the economy. U.S. government bond yields are still lofty relative to most developed nations and that is likely drawing capital from foreign investors looking for higher returns, in our opinion.