Since 1 October, U.S. government bond yields have risen to their highest levels since June, pushing prices down and prodding investors to see bonds’ futures more skeptically than they have since the current economic crisis began.
When the interest rate on bonds rises, the price of those bonds falls.
The rising yields may be the start of a weakening long-term bond market, some money managers think.
“Ten-year yields were close to 2 percent going into the crisis,” said Zachary Squire, CEO of Tekmerion Capital Management. “There is no reason why we can’t get back there in a matter of months.”
The economic recovery, though uneven, has shown more strength than some analysts expected, he said. The recovery could reignite inflation as well as economic growth, making government bonds less attractive.
The rising yields also point to the bond market’s growing belief that Democrats will hold more government power in the new year, raising expectations for a more generous stimulus to sustain the economy as it recovers.
Analysts have been expecting interest rates to remain near zero until 2025, said Praveen Korapaty, Goldman Sachs’ chief rates strategist. If Democrats take power and spend more as a vaccine is validated and widely distributed, the two factors could push rates up as soon as 2023, he added.
Higher bond yields could draw investors away from the growth stocks that have powered much of the equity markets’ steady rise during the economic shutdown, partly because companies’ future cash flows could shrink as inflation rises.
Ultimately, rates will depend on the U.S. Federal Reserve.
If the markets push up bond yields, the Fed may act to keep them down and ensure low rates to keep the economic recovery on track.
