The bond market continues to cause confusion for experts, writes a Charles Schwab strategist in a recent Barron’s article.

Since the end of the recession in 2009, it argues, “consensus expectations have called for higher bond yields and the death of the 35-year bond bull market. Yet, 10-year Treasury yields are now nearly 200 basis points lower than in 2010.”

The author opines that, although economic conditions support bond yields above 2%, market expectations are not aligned with the Fed’s plan to continue tightening monetary policy in the second half of the year. “The divergence in these expectations,” it says, “is a factor holding down bond yields by keeping the risk premium low or even negative.” Without sufficient inflation, the article adds, the Fed is not likely to sell bonds in an effort to boost yields.

The author outlines the following factors that could alter this landscape:

• Congress could push ahead with tax cuts and/or increased government spending later this year;
• Inflation could rise;
• The Fed could tighten policy more than the market anticipates.

The author concludes, “We continue to suggest investors target an average fixed income portfolio duration in the short-to-intermediate term, or about three to seven years.”