Soaring US Treasury yields are driving down stocks
Bearish signal for stock markets while analysts get more nervous
As we write UK stocks have stabilised after a hairy few days prompted by spiralling yields on US Treasury (government bond) yields. Yields rise when the price of Treasuries is falling. Having exceeded 3% for the first time in four years in May, the yield on 10-year Treasuries hit 3.25% on 9 October, its highest level since 2011.
Increased expectations for inflation in a strong US economy have been spooking holders of bonds as rising prices erode the ‘real’ value of the fixed payments from a bond. This has prompted a sell-off, driving down prices and driving up yields.
The rise in yields also reflects expectations for faster increases in US interest rates; the Federal Reserve increased rates to a range of 2% to 2.25% at the end of September – a level not seen since April 2008.
Rising Treasury yields negatively impact stock markets as the income available from relatively lower risk government debt becomes more attractive than that from higher risk equities.
As they also reflect higher costs of borrowing, they could put pressure on business and consumer spending.
If people are buying fewer products and services or if investment within businesses declines then estimated cash flows for many listed companies will likely fall and this will typically result in lower share prices.