2014 was supposed to be the year that yields went higher. Instead, they've dropped to as low as 2.4 percent on Thursday, from 3 percent at the beginning of the year. But Wharton professor of finance Jeremy Siegel says that economic strength will eventually get yields moving modestly higher again.
"When we really get 3 percent, 3-plus percent, 3.5 percent growth in the second quarter, we will see bonds really turn around. And I could see them rise 100 basis points [or 1 percent], maybe not right now, but through the year and into early next year," Siegel said on Thursday's "Futures Now. " "But they will only do so if we get a strong economy."
First-quarter GDP growth was revised down to a 1 percent contraction on Tuesday, which is a far cry from 3 percent. But Siegel says the number actually portends stronger growth in the current quarter.
"The first quarter was a disaster," but "actually the news in this morning's GDP [is] actually slightly favorable for second quarter—a number of analysts have raised it up to 3, 3.5" in anticipation of a Q2 bounce back.
"And you ask yourself, well, why are yields going down? There are just these powerful forces that are continuing to buy bonds—hedge against uncertainty, pension funds de-risking their portfolio, baby boomers are not back really into stocks anywhere the way they used to be, and as a result, the bond market has a really big demand on it that's keeping these yields lower," Siegel said.
Yet the larger economic picture is boosting Treasurys (which move inversely to yields) as well.
"There are just low inflation, low long-term growth. These are just powerful forces acting on the bond market."
Once growth picks up, bonds should take a break, sending yields higher.
But, true to form, Siegel's main takeaway is that stocks continue to look fantastic.
"To me, this is just a very, very bullish background for the stock market, because the biggest competitor for stocks is bonds," Siegel said. "And if they aren't offering any yield, then stocks are the place to be."