Bond Yields
Short-term bond yields (e.g., 2-year Treasuries) are highly influenced by expectations for the Fed Funds Rate. If the Fed signals cuts, short-term yields usually fall.
Long-term bond yields (10-year, 30-year):
- Depend more on inflation expectations, growth outlook, and supply/demand dynamics.
- If there is fear of a recession, investors tend to leave stocks and buy bonds causing prices to rise and yields to drop.
- If supply surges (the Treasury issues tons of debt), yields can rise unless demand matches.
| Reasons yields rise | Reasons yields fall |
|---|---|
| Stronger economic-growth expectations | Weaker growth or recession expectations |
| Higher expected inflation | Lower expected inflation or deflation risk |
| Fed expected to raise rates | Fed expected to cut rates |
| Fewer or later expected rate cuts | Earlier or larger expected rate cuts |
| Strong employment or consumer-spending data | Weak employment or spending data |
| Larger government deficits and Treasury issuance | Reduced Treasury supply or smaller deficits |
| Investors demand a higher term premium | Investors accept a lower term premium |
| Greater uncertainty about inflation or fiscal policy | Greater confidence that inflation is controlled |
| Investors sell safe bonds and embrace risk | Flight to safety during financial or geopolitical stress |
| Reduced foreign demand for Treasuries | Strong foreign, pension, bank, or central-bank demand |
| Quantitative tightening or central-bank bond sales | Quantitative easing or central-bank purchases |
| Rising interest rates in other countries | Falling global interest rates |
| Poor Treasury-auction demand | Strong Treasury-auction demand |
| Improved market liquidity and lower safe-haven demand | Market stress creates demand for liquid Treasuries |
A useful framework
Impact of Rising Yields
- Mortgages become more expensive.
- Companies face higher borrowing and refinancing costs.
- Commercial real estate becomes harder to finance.
- Government interest expense increases.
- Stock cash flows are discounted at a higher rate.
- Treasury bonds become more attractive relative to equities.
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