NEW YORK (Reuters) – US Treasury yields have risen to their highest level in more than a year since record lows in 2020 as Federal Reserve commitments to keep rates close to zero for the coming years encouraged investors to bet on economic growth and warming inflation.
While yields remain low by historical standards, a rapid rise can affect assets ranging from stocks and commodities to house prices.
Here’s what happens:
Why do yields increase?
In recent months, advances in the development of COVID-19 vaccines and fiscal stimulus have raised expectations that the economy will recover. The improvement in risk appetite has encouraged investors to buy riskier assets, such as stocks instead of bonds. Inflation expectations have also jumped, leading to lower bond prices and higher yields. The weakness in debt demand was evidenced in the disappointing seven-year U.S. Treasury bill auction that helped boost yields.
Where do investors believe the returns will come from?
Investors generally believe yields will rise further in 2021, although some think the Fed could limit an increase in yields that it considers extreme enough to threaten economic recovery. Some analysts think this could happen if 10-year Treasury yields rose well above 2% without a substantial economic improvement.
What does the increase in returns mean for other assets?
Higher Treasury yields have made the U.S. dollar more attractive to income-seeking investors, raising it from the three-year lows reached in January.
On the other hand, the spot price of non-yielding gold has fallen this year after surpassing almost all other assets last year.
For equities, rising returns are a combination of stocks, which slows technology recovery and other growth stocks, as investors worry about the erosion of long cash flows for these companies. But higher yields have also boosted financial stocks and accelerated turnover toward other beaten sectors.
How can higher Treasury yields affect individuals?
The effects on individual pockets can be seen more directly in the real estate market. Interest rates charged on fixed-rate mortgages tend to obviate movements in Treasury yields and have already begun to rise.
Savers could see rates of high-yield savings accounts rise again.
Reports by Kate Duguid and Karen Brettell; edited by Megan Davies and David Gregorio