The US 10-year Treasury Bond yield rose today to a seven-year high as the United States approaches full employment and wage growth begins to pick up pace.
Markets were closed yesterday for Columbus Day but reopened to the strong yields. At its peak the yield rose to 3.25% but has since fallen back to 3.22%. Similar gains were seen for the 30-year bonds, which rose to 3.43% and their highest level since 2014.
The Dow Jones, Nasdaq, and S&P 500 all reported losses of approximately 0.5% initially, though by close the markets bounced back – the first positive day for the S&P since last Wednesday. An internal note at JP Morgan said: “Risk sentiment is in a foul mood and stocks are sinking everywhere”.
It may not be time for stock market investors to slow down just yet, however. Craig Bishop, Vice President of U.S. fixed income at RBC Wealth Management, told CNBC: "We haven't seen the uptick in inflation that would normally fuel a backup in the back end of the curve, but the market may be thinking it's only a matter of time”.
The news of the yield increases didn’t affect the Dollar – Yen trading, but it did add to the Euro and Pound Sterling losses, with both currencies less favourable in the face of Brexit and the Italian debt/budget dilemma.
The reason for the bond yields rising is hesitance from investors; as employment maxes out and wage growth grows, so does inflation, and that brings with it interest rate rises. Jerome Powell, the chair of the Federal Reserve, has already said that there is likely to be one more rate rise in 2018, with a further three forecast for 2019. The worry for investors is that as interest rates keep rising, the US will be unable to afford to pay the interest back on its debts. This would be the limit for the Fed, but the result would be increasing living costs against stagnant wages, all of which would lead to an economic slowdown and, if not managed correctly, a recession. These are the economics of boom and bust.
Bond yields began to rise last week in conjunction with weakness in the European, Asian, and US markets. Markets were also hit by the rising price of crude oil, which is also promoting the fear of inflation.
As explained to the London Evening Standard by Russ Mould, investment director at AJ Bell: “The Treasury yield is commonly seen as the risk-free rate for investing, so an increase tends to be negative for other asset classes including shares”.
According to US news outlets, the US Treasury will be auctioning $36 billion of three-year bond notes and $23 billion of 10-year bond notes on Wednesday, with a further $15 billion of 30-year bonds expected to be sold on Thursday.
