WHY YOU NEED TO CARE ABOUT US TREASURY YIELDS
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.’