Yields on U.S Treasuries have soared to their highest level in over a year from record lows hit in 2020, as investors are betting on economic growth and inflation thanks to the Federal Reserve’s commitments to hold rates near zero for years to come.
Even though yields remain low by historical standards, a sharp rise can cascade through to affect all manner of assets such as equities, commodities and even house prices.
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| Photo by Stephen Dawson on Unsplash |
Why are bond yields rising?
Over the past few months, advances in COVID-19 vaccine development and fiscal stimulus have raised expectations of economic recovery.
Growing risk appetite has encouraged investors to buy riskier assets such as stocks rather than bonds.
Expectations of inflation has also risen, driving bond prices lower and yields higher.
Weaker demand for debt was evident in last month’s underwhelming auction of seven-year U.S Treasury notes that helped push up yields.
Where do investors think yields will go next?
Investors generally believe yields will climb more in 2021, though some think the Fed could move to cap a rise in yields that it views as extreme enough to threaten the economic recovery.
A number of analysts believe this could happen if 10-year Treasury yields rise much about 2% without substantial economic improvement.
What does the rise in bond yields mean for other assets?
Higher Treasury yields have made the U.S dollar more attractive to income-seeking investors, boosting it from the three-year lows reached in January.
For stocks, rising yields are a mixed bag, slowing a rally in technology and other growth stocks as investors worry about erosion of long-cash flows for these companies.
But higher yields have also lifted financial stocks and accelerated a rotation into other beaten-down sectors. Whats more, savers could start to see rates increase in high yield savings accounts again.
Effects on individual finances can be seen most directly in the housing market as interest rates charged on fixed-rate mortgages tend to move sympathetically with Treasury yields and have already begun moving higher.
This
article is not advice and has not been prepared in accordance with legal
requirements designed to promote the independence of investment research – no
recommendations are given in the buying, selling or holding of any investments.
Past performance is not a guide to the future. Investments rise and fall in
value so investors could make a loss. Always seek professional advice.