Bond markets throw investors for a loop

Bond markets are doing exactly what most people thought they wouldn't do, and that's putting savers in a bad spot, again.

The yield on the 10-year Treasury - which moves opposite its price - has cratered 18% this year to 1.84% through Friday to its lowest level in a year. Seeing interest rates drop is contrary to the popular wisdom. Many called for higher interest rates this year following 2015's first hike of short-term interest rates by the Federal Reserve in nearly a decade.

Falling interest rates protract the pain for people who rely on income from their savings and investments to live on. Economists came into the year expecting rates to rise and finally give savings more income. But the opposite is happening. "Interest rates are not going to go up as much as people thought and probably not very much at all, says Allen Sinai, chief global economist at Decision Economics. "Persistently low interest rates are a by-product."

There are several forces at work pushing interest rates down including:

* Aggressive money-easing policies in most parts of the world. Central banks mostly aren't raising rates, they're slashing them. Several central banks around the world, including the Bank of Japan, European Central Bank, Swedish central bank, Danish central bank and Swiss National Bank, have cut rates so much, they're now negative, says Standard & Poor's. Investors are starting to think even the Fed will slow down its push to bump up short-term rates. Investors are only pricing in an 8% chance of a rate hike at the Fed's March meeting, according to CME Group FedWatch.

* Rock-bottom inflation and plummeting oil prices. Banks are lowering rates because prices aren't rising much, Sinai says. Most central banks target 2% inflation, but that's not happening. Falling oil prices are a big reason why inflation is so low, Sinai says. The price of a barrel of oil is down 70% over the past two years. Energy is a big piece of inflation targets, so seeing that fall puts central banks in the position to spur the economy, not cool it off. Technology, which drives down costs and prices, is also a force that's been keeping inflation low, Sinai says. The role of technology to keep prices down is one of the "biggest surprises of a century," he says.

* Flight to safety. Investors have plenty of reason to buy bonds to hide from stocks, given what the stock market has been doing. The Standard & Poor's 500 is down 8% this year while the Vanguard Bond Index is up 1.2%. Investors are willing to settle for a low yield so they don't have to deal with the volatility.

Low rates and the dimming hopes of much higher rates keep savers in a bind. One of the only ways out is to buy shares of high-quality companies with high dividend yields, Sinai says. The S&P 500 is currently yielding 2.2% - which beats the 10-year Treasury. "Central banks are going to ease more - or with the Fed - not tighten (as fast as many thought," Sinai says. "That means lower interest rates."