The US Treasury Department is seen in Washington, DC, USA on August 30, 2020. Portal/Andrew Kelly/File Photo Acquire License Rights
NEW YORK, Oct 5 (Portal) – A sell-off in U.S. Treasury bonds is shaking everything from stocks to the housing market as investors recalibrate their portfolios as Treasury yields rise to their highest level in more than a decade and a half.
Benchmark 10-year Treasury yields, which move inversely to prices, are near levels last seen in 2007, following a sell-off due to a hawkish Federal Reserve forecast and growing fiscal worries came. Treasury bonds are on track to post their third consecutive annual loss, an event unprecedented in U.S. history, according to Bank of America Global Research.
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 8% below 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.
Here are some examples of how rising yields have impacted 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.
With some Treasury bond maturities offering well over 5% to investors who hold the bonds to maturity, rising yields have also reduced the appeal of stocks. High-dividend paying stocks in sectors such as utilities and real estate were hit hardest as investors gravitate toward government bonds.
Stocks of technology and growth companies, whose future earnings are more heavily discounted when yields are higher, have also suffered.
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Another result of the rise in yields has been a recovery in the dollar, which has gained about 7% 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 its 10-month high.
A stronger dollar contributes to tightening financial conditions and may hurt the balance sheets of U.S. exporters and multinational corporations. Globally, it is complicating central banks’ efforts to contain inflation by devaluing other currencies.
Traders have been waiting for weeks for possible intervention by Japanese officials to counter a continued depreciation of the yen, which has fallen 12% against the dollar this year.
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.
That has damaged homebuilders’ confidence and put 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.
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With Treasury yields rising, credit market spreads have widened as investors demand higher returns on riskier assets such as corporate bonds.
Spreads, which are charged on corporate bonds as a premium over government bonds or credit spreads (.MERC0A0), (.MERH0A0), had calmed following the collapse of Silicon Valley Bank (SVB) and New York’s Signature Bank in March.
However, the recent rise in yields has led to a renewed widening of credit spreads, increasing financing costs for potential borrowers.
With little clarity on interest rate trends and brewing U.S. budget problems, few expect bond volatility to ease any time soon.
The Fed has signaled it will keep interest rates elevated through 2024, although investors expect cuts as early as June 2024.
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), a measure of expected volatility in U.S. Treasury bonds, has risen to a four-month high, signaling expectations of continued turmoil in the Treasury market.
Reporting by Saqib Iqbal Ahmed; additional reporting by Davide Barbuscia; written by Ira Iosebashvili and Nick Zieminski
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