US Treasury yields soar and put a damper on stocks, as investors expect high rates
The name’s Bond… T-Bond. The 10-year Treasury yield (basically: the interest rate the US government pays to borrow money) rose to 4.35% this week — the highest in 16 years. Why have Uncle Sam’s payouts on IOUs been getting fatter? Largely because investors expect that the Fed may keep rates higher for longer. When folks expect higher rates, the price of existing bonds tend to fall (investors sell “old” bonds, expecting that new issues of those same bonds will pay out at higher rates). When bond prices fall, yields rise.
Good “bad” news is pressuring yields… and markets. Recent data suggests the US economy is still booming and defying predictions of a slowdown. Unemployment is near historic lows, inflation is slowing (but is still too high), and wage growth is hot. All this “good” news is making investors worried that the Fed’s economy-cooling work is far from over, which is pushing Treasury yields higher.
US stocks have rallied this summer, but rising yields and higher-rate expectations can rain on market parades. Historically, rising Treasury yields tend to hurt stock prices.
New math: As returns from low-risk investments (like US Treasury bonds) rise, investors demand higher returns from stocks to justify the changed opportunity cost.
The economy needs to yield… for the central bank to bring rates down. Last week, the Atlanta Fed lifted its prediction for US third-quarter GDP growth. Until the stubbornly strong economy and labor market yield to Fed pressure, rate cuts likely won’t be in the cards. Meanwhile, investors will be closely watching Fed Chair Powell’s speech on Friday at Jackson Hole for any hints about future policy.