The sharp increase this month in U.S. government-bond yields is sending tremors through stocks, weighing on hot technology shares and some other sectors while prompting a deeper reassessment of the threat posed by rising interest rates.
For now, many investors remain optimistic because the reasons behind the bond retrenchment are mostly positive. Stuck near historic lows for most of last year, Treasury yields have climbed in recent months along with investors’ expectations for a strong economic rebound, driven in part by more debt-financed government spending.
Rising yields, which result from falling bond prices, often reflect investors’ expectations of faster growth and an accompanying rise in inflation, which erodes the purchasing power of bonds’ fixed payments and can eventually lead the Federal Reserve to raise short-term interest rates. More government borrowing also can boost yields by increasing the supply of bonds. Though many investors are keeping an eye on inflation data, analysts and portfolio managers say so far there is little reason to believe price levels will rise enough to prompt the Fed to raise rates any time soon, which looms as perhaps the greatest risk to major stock indexes.
“The market has principally been saying, ‘Hooray, the pandemic is coming under control and the economy is starting to grow again,’” said Brad McMillan, chief investment officer at Commonwealth Financial Network, an investment adviser and brokerage firm. “But now we’re actually starting to see the consequences of that in the form of higher rates, and I think the market’s processing that.”
As of Friday, the yield on the benchmark 10-year U.S. Treasury note stood at 1.344%, up from 1.157% just five trading sessions earlier and roughly 0.9% at the start of the year.