WHY YOU NEED TO CARE ABOUT US TREA­SURY YIELDS

Shares - - GREAT IDEAS UPDATES -

EAR­LIER THIS YEAR the yield on US Trea­suries (aka US gov­ern­ment bonds) ex­ceeded 3% for the first time in four years.

Height­ened ex­pec­ta­tions for in­fla­tion in the US spooked hold­ers of bonds as ris­ing prices erode the value of the fixed coupon pay­ments they get from the bond. This put neg­a­tive pres­sure on prices and pushed yields higher.

When in­ter­est rates are in­creased as mone­tary pol­i­cy­mak­ers re­spond to in­fla­tion, the yield on shorter term debt also goes up.

Even­tu­ally the point at which the yield on the two-year Trea­sury ex­ceeds that of the 10-year has his­tor­i­cally sig­nalled a loom­ing re­ces­sion.

At the time of writ­ing the two-year yield stood at 2.55% and the 10-year yield was 3.01%.

Higher bond yields have neg­a­tive im­pli­ca­tions for eq­ui­ties. Higher bor­row­ing costs for com­pa­nies

There are prob­a­bly three prices that re­ally mat­ter to global in­vestors – the dollar, oil and the 10-year Trea­sury yield

can re­sult in less cash to in­vest for the fu­ture and to re­turn to share­hold­ers through div­i­dends, or po­ten­tially re­sult in firms go­ing bust if they can’t ser­vice their debt.

The higher yield avail­able on low-risk bonds can also draw cap­i­tal out of higher-risk eq­ui­ties. The yield on the S&P 500 is cur­rently less than 2%.

Patrick Thomas, in­vest­ment man­ager at Canac­cord Ge­nu­ity Wealth Man­age­ment, says: ‘There are prob­a­bly three prices that re­ally mat­ter to global in­vestors – the dollar, oil and the 10-year Trea­sury yield.

‘Surg­ing dollar and oil prices along with Trea­sury yields pop­ping have been fairly omi­nous signs for UK in­vestors in the past.

‘Think 1973-1975, 1979-80, 1989-90, 1999-2000 and 2006-2007. The UK can­not be in­su­lated from rises in global fund­ing costs.’

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.