Why bond yields are rising and what stock investors should do about that
Bond traders are at it again, pushing Treasury yields higher and signaling the Federal Reserve was too heavy-handed when it cut interest rates by a half-percentage point last month. The recently rising yields have put pressure on the stock market — and specifically, names in our portfolio tied to housing. The 10-year Treasury yield — which influences all kinds of consumer loans, including mortgage rates — rose again Wednesday, reaching a session-high 4.26%. That’s a level not seen since late July when the yield had started to turn lower in anticipation of the Fed rate cut, which came on Sept. 18. Since then, though, the 10-year yield has been working its way higher. On the shorter end of the yield curve, the 2-year chart follows a similar pattern. US10Y US2Y 3M mountain Three month performance The hope when the Fed started cutting rates was that shorter-duration Treasurys would move lower at a greater pace than longer-dated ones, providing relief to borrowers and investors. That’s not what has been happening lately. The 2-year and 10-year yields have recently been moving higher together. Rates are like gravity for stocks — the higher the rates, the greater the competition for investment dollars. Elevated, risk-free government bond yields become an enticing way to get returns when compared to the volatility of stocks. A higher 10-year Treasury yield also halts relief on mortgage rates. The average 30-year fixed-rate mortgage, while more than 1 percentage point lower than a year ago, has moved higher three weeks in a row. In Freddie Mac’s latest weekly survey , the 30-year fixed rate was 6.44%. The Fed cutting rates represents an easing of monetary policy, which allows the economy to grow quicker and easier and makes debt more affordable. The downside of those dynamics is that a hotter economy also raises the prospects of sparking inflation again, just as it has started to moderate. Bond traders are worried about rekindling inflation because economic numbers have been coming in stronger since central bankers met in September. The market odds on a quarter-point Fed cut next month remain basically a lock, according to the CME FedWatch tool . But after that, the chances of a December cut are dwindling. A troublesome rebound in inflation, however, is not what we’re calling for, and it’s not what we’re basing the Club’s investment decisions on. Another dynamic pushing bond yields higher is concern over what happens to the national debt and trade deficit under a new presidential administration. Whether the move up in yields is a bet on next month’s election or reflects a that view that regardless of who wins, fiscal policy will remain loose, is anyone’s guess. Both presidential candidates do seem to agree on one thing: The cost of living is too high. A large, unavoidable line item on consumers’ balance sheets is housing costs, which have been one of the stickiest areas of inflation. For home prices to come down, we need more housing supply…
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