The yield on the benchmark 10-year Treasury bond may only be 2.4%, but it has come a long way toward fair value in just two short months, according to Jim Kochan, chief fixed income strategist Wells Fargo Funds Management. ‘It’s a lot better than 1.8% where it was two months ago,’ said Kochan. ‘I think there is one more concern looking forward and that is when the Federal Reserve actually announces it is going to start raising the federal funds rate. We might see that yield get to 2.6% or 2.7%. We are closer to fair value now certainly than we were several months ago.’ Staying with government issued bonds, Kochan said he is not a fan of Treasury Inflation-Protected Securities, or TIPS, despite recent indications of rising inflation. Core CPI rose 0.3% in April, ahead of Wall Street’s 0.2% consensus estimate and the surge in hiring in May also boosted wages with average pay rising $0.08 to $24.96 an hour. That was a 2.3% jump over last year and the highest rate since mid-2013. ‘And even though we are seeing a little more inflation in the United States, the way that TIPS are calculated you will see low total returns for the remainder of this year,’ said Kochan.
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