10-year U.S. Treasury yieldIt reached 5% for the first time since 2007. This matters to everyone, not just Wall Street.
U.S. Treasury yields have been rising rapidly,10-Year Treasury Bond YieldIt rose from less than 3.5% in the spring and 0.5% at the beginning of the epidemic to touch 5.02% on Monday (23rd) morning. That jump means the U.S. government must pay more to borrow money from investors to cover its spending.
It also directly affects people around the world because 10-year U.S. Treasury yieldIt is at the heart of the global financial system and helps determine the prices of various other loans and investments.In addition to making it more expensive for American homebuyers to buy a home through a mortgage, rising yields have also made it more expensive for investors from stocks tocryptocurrencyThe prices of various commodities have brought downward pressure. It could also ultimately lead to companies laying off more workers.
Higher yields have also created a sharp shift among contemporary consumers and investors, who have known almost exclusively low yields as central banks have kept benchmark interest rates near zero. Such low interest rates make it easier for people to borrow money, helping the economy strengthen after other problems such as the 2008 financial crisis, the European debt crisis and the coronavirus pandemic.
Low interest rates cause prices for homes, stocks and other investments to rise, but they can also encourage excessive risk-taking and fuel investment bubbles.
Now, the central bank is more concerned about controlling high inflation. To do this, they raise interest rates in the hope that higher borrowing costs will curb inflation by reducing spending.
The Federal Reserve’s (Fed) key interest rate affects very short-term loans, which are what banks call overnight. The Fed has raised the federal funds rate to its highest level since 2001 and is debating whether to raise rates again. Either way, it means keeping interest rates high for a while to successfully curb inflation.
It comes after a series of reports showed the U.S. economy remains remarkably resilient.10-Year Treasury Bond Yieldhas been chasing the Fed’s key interest rates. While this eases concerns that higher interest rates could lead to a recession, it could also put upward pressure on inflation and short-term interest rates.
Fed Chairman Jerome Powell said last Thursday (19th) that many other factors may lead to 10-Year Treasury Bond Yieldrise rapidly. These include the U.S. government’s massive deficit, the need for more federal borrowing, and the Fed’s continued efforts to reduce its massive bond investments previously built to keep yields low.
On the other hand, bond prices are also falling in tandem with stock prices more often than before. For investors who typically view bonds as a safer part of their portfolios, this is troubling and could prompt them to pursue higher yields to hold bonds.
10-Year Treasury Bond YieldThe rise most directly means the U.S. government must pay more for 10-year borrowings.But because 10-year yieldA reference point in financial markets, it also quickly penetrated into all types of loans.
Even for companies with the best credit ratings, the interest rate they borrow at is on top of what the U.S. government pays on its Treasury debt, plus a few extra percentage points. Borrowers with poor credit ratings must pay more to repay their debt than those who are considered good bets.
Rising borrowing costs have led to reduced spending by U.S. households and reduced business expansion, ultimately affecting overall U.S. economic activity.
More immediately, because the 10-year Treasury bond is considered one of the safest investments on the planet, its yield quickly affects the prices of various investments.
When super-safe U.S. Treasuries have to pay more interest, investors will feel no need to invest in big tech stocks,cryptocurrencyOr other riskier investments pay a premium.This isS&P 500 IndexThis year’s growth rate dropped from 19.5% at the end of July to 10% last Friday (20th).
Higher U.S. bond yields also attract more overseas investment, meaning investors are increasingly converting their domestic currencies into U.S. dollars.Since the end of July, the U.S. dollar hasEURhas risen about 4% againstGBProse 5% againstAustralian dollarUp about 6%.
While a stronger dollar helps U.S. tourists buy more abroad, it can also increase financial stress in other countries and fuel inflation.
Even for U.S. bond investors, the rapid rise in bond yields has brought investment losses. When new bonds pay higher yields, older, lower-yielding bonds already in a portfolio or mutual fund lose their appeal, driving down their prices.
The largest U.S. bond mutual fund has fallen about 3% this year and is on track for a third consecutive year of losses; something that has never happened since its inception in 1987.
2023-10-23 13:55:34
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