Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., August 29, 2023. Portal/Brendan McDermid ACQUIRES LICENSE RIGHTS
NEW YORK, Oct 19 (Portal) – Relentless selling of U.S. Treasury bonds has pushed Treasury yields to their highest in more than a decade and a half and sent everything from stocks to the housing market into turmoil.
The yield on the benchmark 10-year Treasury note – which moves inversely to prices – briefly reached 5% late Thursday, a level last seen in 2007. Factors driving this include expectations that the Federal Reserve will keep interest rates elevated and increasing fiscal concerns in the US.
With the $25 trillion Treasury market considered the bedrock of the global financial system, rising U.S. Treasury yields have had far-reaching implications. The S&P 500 is about 7% off its yearly highs as the promise of guaranteed returns on U.S. Treasury bonds pulls investors away from stocks. Mortgage interest rates are now at their highest level in more than 20 years and are weighing on property prices.
“Investors need to take a very close look at risky assets,” said Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities in New York. “The longer we stay at higher interest rates, the more likely something is to break.”
Fed Chairman Jerome Powell said Thursday that monetary policy does not feel “too tight,” backing those who believe interest rates are likely to remain high.
Powell also pointed to the “term premium” as a driver of returns. The term premium is the additional compensation investors expect for holding longer-term debt and is measured using financial models. Their increase was recently cited by a Fed president as a reason that the Fed may have less need to raise rates.
Here’s a look at some of the effects of rising yields on the markets.
Higher yields on government bonds can dampen investor appetite for stocks and other risky assets by tightening financing conditions as they raise borrowing costs for companies and individuals.
Elon Musk warned that high interest rates could weaken demand for electric vehicles, causing stocks in the sector to fall on Thursday. Shares of Tesla closed the day down 9.3% as some analysts questioned whether the company can sustain the rapid growth that has set it apart from other automakers for years.
As investors gravitate toward government bonds, with some maturities currently offering well over 5% to investors who hold the bonds to maturity, high-dividend paying stocks in sectors such as utilities and real estate have been hit hardest.
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The U.S. dollar has gained about 6.4% on average against its G10 peers since the rise in Treasury yields accelerated in mid-July. The dollar index, which measures the dollar’s strength against six major currencies, is near an 11-month high.
A stronger dollar contributes to tightening financial conditions and may hurt the balance sheets of U.S. exporters and multinational corporations. Around the world, it is complicating other central banks’ efforts to curb inflation by devaluing their currencies.
For weeks, traders have been waiting for possible intervention by Japanese officials to counter a continued depreciation of the yen, which has fallen 12.5% against the dollar this year.
“The USD’s correlation with interest rates has been positive and strong during the current monetary tightening cycle,” BofA Global Research strategist Athanasios Vamvakidis said in a note on Thursday.
The interest rate on the 30-year fixed-rate mortgage – the most popular home loan in the U.S. – has shot to its highest level since 2000, denting homebuilders’ confidence and putting pressure on mortgage applications.
In an otherwise robust economy with a strong labor market and robust consumer spending, the housing market has stood out as the sector hit hardest by the Fed’s aggressive actions to cool demand and suppress inflation.
U.S. existing home sales fell to their lowest level in 13 years in September.
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As Treasury yields rise, credit market spreads have widened as investors demand higher returns on riskier assets such as corporate bonds. After a banking crisis this year, credit spreads exploded, only to tighten in the months that followed.
However, the rise in yields has pushed the ICE BofA High Yield Index (.MERH0A0) near a four-month high, raising the cost of financing for potential borrowers.
Volatility in U.S. stocks and bonds has increased in recent weeks as expectations of Fed policy have changed. Expectations of an increase in U.S. government deficit spending and debt issuance to cover that spending have also spooked investors.
The MOVE index (.MOVE), which measures expected volatility in U.S. Treasury bonds, is near its highest level in more than four months. Stock volatility has also increased, pushing the Cboe Volatility Index (.VIX) to a five-month high.
(This story has been re-archived to add the omitted word “briefly” in paragraph 2.)
Reporting by Saqib Iqbal Ahmed; Writing by Ira Iosebashvili; Edited by Stephen Coates
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