Feb 08, 2021 10:58 PM EST
Yields on U.S. Treasuries are rising once more, given how expectations of an economic rebound are rising as well. These speculations have pushed the 30-year yield above 2% on Monday for the first time ever since the COVID-19 pandemic began.
As a result, the benchmark 10-year yield has now reached its highest level since early 2020. What are the implications of rising bond yields? Is it supposed to be alarming?
According to Reuters, although they remain historically low, a rapid rise in yields can certainly has an impact on different markets. It will send a ripple through to other assets, affecting everything, not just the financial stocks or other financial products, but also up to the housing market.
Why are yields rising in the first place even though the COVID-19 pandemic is far from over?
It can be recalled that the Federal Reserve cut interest rates to near-zero levels in March 2020 so that even in the midst of a pandemic, borrowing can be stimulated and spending can be spurred. This was supposed to kick the economy out of a pandemic-fueled recession. Yields across maturities hit record lows at the time, for understandable reasons.
However in recent months, following some breakthroughs made in the development of COVID-19 vaccines even though the pandemic cannot be described as over and expectations of more fiscal stimulus under a Democrat-led Congress and President Biden, certainly raised some hopes up.
This positive shift in consumers, investors and borrows' mood certainly have caused the yields to rise. Some investors were out of Treasuries and attracted into checking out comparatively riskier assets such as stocks. That served as the main reasons why yields have been lifted to their recent highs.
The yield on the 30-year Treasury bond overnight Monday rose to 2.006%, which is already its highest since February 2020. It can be remembered that when the the pandemic happened and spread globally, the yield hit an all-time low of 0.702% in March last year. This is very low since back on the first trading day of 2020, the yield closed at 2.340%.
The yield on the benchmark 10-year Treasury note on Monday rose to 1.200%, also the highest since March 2020.
Real yields, which takes into consideration of inflation, have edged higher this year too. But because the pandemic is far from completely over, though they still remain in negative territory. These rising inflation expectations just meant investor confidence in the economy is slowly coming back.
Higher Treasury yields have boosted the dollar up by approximately 1.45% against the euro this year. Higher yields make the currency more attractive to income-seeking investors and this have a lot of implications.
Presently, since it is still too premature to know the whole extent of the rising numbers' impact, it can be seen that rising yields so far had been a mixed bag for stocks.
Shares of financial companies, which benefit from higher rates, are up 5.14% this year. When considering the S&P U.S. Financials index, these shares can be seen to have outpacedthe S&P 500 index, which is up 3.71% over the same period.
Non-cyclical stocks, which are less attuned to market moves, like utilities, are expected to have declining values.
In addition, the effects of higher yields beyond Corporate America can become quite apparent in the housing market. The interest rates charged on fixed-rate mortgages tend to shadow moves in Treasury yields and so far, given rising bond yields, they have already begun edging higher.
The average rate on a 30-year mortgage, based on data provided by the Mortgage Bankers' Association, has ticked higher since 2021 started. At present, it remains just 6 basis points off its record low.
Some analysts worry about rising mortgages when the COVID-19 is not yet over.
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