Bonds are supposed to be boring. But there is nothing dull about a 5% yield on the benchmark 10-year U.S. Treasury note, a psychologically significant level that is on the cusp of being breached for the first time since 2007.
It may take a recession scare to send bond yields back down.
The 10-year yield was up 0.1 percentage point on Thursday, to 4.98%. It has climbed 1.2 percentage points since July alone, as investors have increasingly priced in the likelihood that the Federal Reserve will lift interest rates higher than expected and leave them there longer. Data showing strength in the labor market, retail sales, and elsewhere in the economy have lifted expectations for inflation, prompting investors to factor in tighter monetary policy later into 2024. Remarks from Fed chair Jerome Powell on Thursday afternoon added to that thesis.
Compare the 10-year’s current yield to when it was around 0.5% at its 2020 low point. Back then, investors frightened by the pandemic were hiding out in risk-free Treasuries and the Fed had dropped the federal-funds rate to a hair above zero.
The higher yields on offer today are an attractive opportunity for investors looking for some greater risk-free income, but achieving them has been painful for those already holding bonds in their portfolios. Bonds’ prices fall as their yields rise.
Yields elsewhere on the Treasury curve have also been rising lately, but the 10-year tends to get the most attention. The two-year Treasury note yield was 5.23% on Thursday, while the 30-year bond yield hit 5.09%.
Benchmark Treasuries affect yields on corporate bonds, mortgage-backed securities, and other debt. The iShares Core U.S. Aggregate Bond exchange-traded fund (ticker: AGG) was at $91.75 on Thursday, down 0.3%. The ETF is on track for its third-consecutive annual price decline in 2023.
Higher bond yields are also typically a headwind for the stock market—and they certainly have been since the late summer. The
S&P 500
is down 6% since the start of August, as yields have climbed.
Higher bond yields mean more competition for stocks as an attractive alternative in investors’ portfolios. They weigh most on the high-multiple shares of growth companies that are expected to generate more of their profits in the future.
Those are many of the same stocks that had been leading the stock market higher in 2023. The Technology Select Sector SPDR ETF (XLK) is down 6.5% since its mid-July peak, before the upward move in bond yields accelerated.
So-called “bond proxy” stocks—those that investors buy mainly for their dividend income, rather than capital appreciation—have also been hit by rising bond yields. The Utilities Select Sector SPDR ETF (XLU) has dropped 11% since mid July. The Consumer Staples Select Sector SPDR ETF (XLP) has lost 9%. A 5% risk-free Treasury yield can be a more attractive option for many income investors.
Gold had also been under pressure from higher bond yields, falling to a seven-month low in early October around $1,830. The metal pays no interest, so it becomes less attractive by comparison when bond payouts become more generous. Higher bond yields have also pushed up the U.S. dollar—the U.S. Dollar Index (DXY) has gained 7% since mid July. When the greenback becomes more valuable, an ounce of gold is worth fewer dollars.
But, like Treasuries, gold is also a haven asset. The outbreak of violence in Israel and Gaza has helped gold rebound to around $1,964 an ounce.
Back in the U.S., economic strength is still pushing Treasury yields higher and higher. If investors become more worried about a recession, the trend should reverse. They will price in slower inflation and a lower fed-funds rate. Geopolitical escalation can also prompt investors to seek the safety of Treasuries.
But with the 10-year yield nearing 5%, that clearly isn’t top of mind at the moment.
Write to Nicholas Jasinski at [email protected]
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