Rising Treasuries cause volatility across markets

US Treasury Department on August 30, 2020 in Washington, DC, US. REUTERS/Andrew Kelly/File Photo Get license rights

NEW YORK, Oct 5 (Reuters) – A selloff in U.S. government bonds rattled everything from stocks to the real estate market as investors rebalanced their portfolios as Treasury yields hit their highest level in more than a decade and a half.

The benchmark 10-year U.S. Treasury yield, moving inversely to prices, is near levels last seen in 2007 following a sell-off fueled by the Federal Reserve and mounting financial concerns. According to Bank of America Global Research, Treasuries are on track to record their third straight annual loss, an event unprecedented in US history.

As the $25-trillion Treasury market is considered the bedrock of the global financial system, the rise in yields on U.S. government bonds had far-reaching consequences. The S&P 500 is down about 8% from this year’s highs as the promise of guaranteed yields on U.S. government debt lured investors away from equities. Mortgage rates, meanwhile, have weighed on real estate prices and are at more than 20-year highs.

Here’s a look at some of the ways that rising yields are reverberating across markets.

Higher Treasury yields can curb investors’ appetite for stocks and other risky assets by tightening financing conditions as they raise the cost of borrowing for companies and individuals.

Rising yields have also dulled the attractiveness of stocks for investors holding bonds for a limited period, with some Treasury maturities yielding more than 5%. High dividend-paying stocks in sectors such as utilities and real estate have been hit hardest as investors gravitate toward government debt.

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Stocks of technology and growth companies whose future profits are heavily discounted against higher yields.

Reuters Graphics

Another effect of the rise in yields is the dollar, which has advanced about 7% on average against its G10 peers since the rise in Treasury yields accelerated in mid-July. The dollar index, which measures the buck’s strength against six major currencies, is near a 10-month high.

A strong dollar helps tighten financial conditions and could hurt the balance sheets of U.S. exporters and multinational corporations. Globally, this complicates efforts by central banks to reduce inflation by devaluing other currencies.

Traders have been watching for weeks for possible intervention by Japanese authorities to combat a lingering depreciation in the yen, which has fallen 12% against the dollar this year.

The interest rate on a 30-year fixed-rate mortgage — the most popular U.S. home loan — is at its highest since 2000.

This affects the confidence of home builders and pressures mortgage applications.

In an otherwise resilient economy with a strong job market and robust consumer spending, the housing market has been hit hard by the central bank’s aggressive moves to curb demand and lower inflation.

Reuters Graphics

Credit market spreads widened as Treasury yields rose and investors sought higher yields in riskier assets such as corporate bonds.

During the collapse of Silicon Valley Bank (SVB) and New York Signature Bank in March, corporate bonds were charged at a premium over Treasuries or credit spreads (.MERC0A0), (.MERH0A0).

However, the recent rise in yields has widened credit spreads again, adding to funding costs for prospective borrowers.

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With interest rates and little clarity on the path the U.S. financial crisis will play out, few expect volatility in bonds to ease anytime soon.

The central bank has signaled it will keep raising rates until 2024, though investors will see a cut in June 2024.

The U.S. government’s deficit spending and the prospect of a surge in lending to cover that spending have worried investors.

The MOVE Index (.MOVE), a measure of expected volatility in US Treasuries, rose to a 4-month high, indicating expectations for continued Treasury market volatility.

Report by Saqib Iqbal Ahmed; Additional reporting by David Barbuccia; Written by Ira Iospashvili and Nick Zieminsky

Our Standards: Thomson Reuters Trust Principles.

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