Soar­ing US Trea­sury yields are driv­ing down stocks

Bearish sig­nal for stock mar­kets while an­a­lysts get more ner­vous

Shares - - CONTENTS -

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.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.