Rising Treasury yields are igniting turmoil across markets

NEW YORK (Reuters) – A sell-off in U.S. government bonds has rattled everything from stocks to the real estate market, as investors recalibrate their portfolios amid Treasury yields rising to their highest levels in more than a decade and a half.

Yields on the benchmark 10-year US Treasury note, which move inversely with prices, stand near levels last seen in 2007 after a sell-off fueled by a hawkish outlook from the Federal Reserve and rising financial concerns. Treasuries are on track to post their third straight annual loss, an unprecedented event in U.S. history, according to Bank of America Global Research.

Because the $25 trillion Treasury market is the bedrock of the global financial system, rising yields on US government bonds have had widespread effects. The S&P 500 index is down about 8% from this year’s highs, as the promise of guaranteed returns on US government debt scares investors away from stocks. Meanwhile, mortgage rates are at their highest levels in more than 20 years, affecting real estate prices.

Here’s a look at some of the ways the rise in yields has been echoed across markets.

Higher Treasury yields can curb investors’ appetite for stocks and other risky assets by tightening financial conditions because they raise the cost of credit for businesses and individuals.

With some Treasury bonds offering maturities well above 5% for investors who hold bonds to term, rising yields have also dampened the appeal of stocks. High-dividend stocks in sectors such as utilities and real estate were among the hardest hit, as investors gravitated toward government debt.

Technology and growth stocks, whose future earnings are more steeply discounted to higher yields, have also suffered.

Another result of the rise in yields has been a rebound in the dollar, which has advanced by an average of about 7% against its G10 peers since the rise in Treasury yields accelerated in mid-July. The dollar index, which measures the dollar’s strength against six major currencies, stands near its highest levels in 10 months.

A stronger dollar helps tighten financial conditions and could hurt the balance sheets of US exporters and multinational companies. Globally, it complicates central banks’ efforts to reduce inflation by pushing other currencies lower.

Traders have been watching for weeks for possible intervention by Japanese officials to combat the continuing decline in the value of the yen, which has fallen 12% against the dollar this year.

The interest rate on the thirty-year fixed-rate mortgage – the most popular home loan in the United States – has risen to its highest levels since 2000.

This hurts homebuilder confidence and puts pressure on mortgage applications.

In a resilient economy characterized by a strong labor market and strong consumer spending, the housing market has emerged as the sector most affected by the Federal Reserve’s aggressive measures to cool demand and undermine inflation.

As Treasury yields rise, interest rate spreads in the credit market widen as investors demand higher returns on riskier assets, such as corporate bonds.

Spreads charged on corporate bonds as a premium to Treasuries or credit spreads (.MERC0A0) (.MERH0A0) have calmed after exploding during the collapse of Silicon Valley Bank (SVB) and Signature Bank of New York in March.

However, the recent rise in yields has led to credit spreads widening again, increasing financing costs for potential borrowers.

With little clarity on the path of interest rates and financial problems brewing in the United States, few expect bond volatility to subside any time soon.

The Fed has indicated that it will keep interest rates high through 2024, although investors expect cuts as early as June 2024.

The expectation of a rise in the US government spending deficit and the issuance of debt to cover these expenses also caused concern among investors.

The MOVE Index (.MOVE), a measure of expected volatility in US Treasuries, rose to its highest level in 4 months, indicating expectations of continued turmoil in the Treasuries market.

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