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.
| Reasons yields rise |
|---|
| 1. Economic Boom – Strong GDP, employment, consumer-spending. There is strong demand for capital and loan providers can demand higher returns for loaned capital. |
| 2. Rising inflation, Fed raising rates. There is an expectation that inflation is going to be higher, fed is expected to raise rates in the future. So bond investors demand higher yield for loaned capital, since the money they loan to the US government will be less valuable in the future due to inflation. |
| 3. Larger government Debt and Treasury issuance Government needs to taken on more debt as it is not bringing in enough revenue to meet expenses. Issues more debt. Supply increases compared to existing demand for US bonds, causing prices to fall and yields to rise. |
| 4. Loss of trust in the US Government – Concerns could be due to geopolitics like US trade relations souring resulting in other countries dumping US bonds or just the perception that US is fiscally irresponsible cuasing investors to dump bonds. |
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.
