On 17 August, the benchmark 10-year treasury note closed at 4.307 percent, which was its highest close since 2007. The 30-year treasury bond was paying 4.411 percent on the same day.
Last week’s high yields worried investors about their meaning for bond, equity, and mortgage markets. Unusually high bond yields often have destabilizing effects. Tech stocks, which typically use debt to finance growth and are highly sensitive to high-interest rates, were hit hard.
Treasury yields above 4.75 percent pose a threat to stocks, UMB Financial analysts have said.
The tech-heavy NASDAQ fell 6.1 percent during the first 17 days of this month.
Also, the 10-year rate was still well below the two-year note’s rate of 4.92 percent on 17 August.
This “yield curve inversion” often has signaled recession. When the short-term yield rises above the long-term, it can mean that investors see the economy growing worse in the future.
“When investors start demanding higher yields on longer-term bonds to compensate for the risk of inflation, that is correlated with lower risk asset prices,” portfolio manager Zhiwei Ren at Penn Mutual Asset Management told The Wall Street Journal. “That’s what markets are worried about right now.”
The 10-year note’s yield has been moving up in recent weeks after the U.S. treasury has announced it will need to borrow hundreds of billions of dollars more to fund the higher debt limit Congress agreed to this spring.
Pouring those new bonds into the market is likely to push bond prices down and drive yields up. The two move inversely to each other.
Also, investors have increasingly come to believe that the U.S. Federal Reserve will tame inflation without causing a recession but will leave interest rates high for several more months. That has helped keep bond returns higher.
However, the high yield is not good news for stocks. Bonds’ higher returns—especially if the Fed reins inflation back to its 2-percent target—can draw investors away from stocks when equity markets’ futures are cloudy, as it is now.
Also, mortgage interest rates are closely tied to the 10-year treasury’s yield. The average home loan interest rate hit a 21-year high of 7.09 percent last week, the Federal Home Loan Mortgage Corp. reported.
TREND FORECAST: Please read our ECONOMIC UPDATE in this issue of The Trends Journal for our trends analysis and trend forecasts on treasuries and mortgage rates.