Selling in U.S. Government Bonds Accelerates, Sending Treasury Yields Soaring

By: Montana Timpson

As uncertainty over the pace of recent economic expansion continues to unsettle financial markets, selling in U.S. government bonds is accelerating, sending Treasury yields soaring above 1.7% — the highest recorded levels since January 2020.

The Treasury Yield’s Extended Surge
The latest surge in the 10-year yield, which settled at 1.73%, extended a multi-month climb spurred by expectations for a vaccine- and government-stimulus fueled economic recovery.

The rise in yields, which move opposite to price, sent stocks falling on Thursday, and high-growth stocks and the tech sector were particularly hard hit. The tech-heavy Nasdaq Composite saw a 3% loss, while the S&P 500 dropped 1.5%.

The catalyst for last week’s yield surge stemmed in part from federal announcements following the Federal Reserve’s two-day policy meeting that came to a close on Wednesday. Upon the close, U.S. Federal Reserve Chairman Jerome Powell reassured the market that the central bank isn’t ready to dial back its bond purchases and other supportive measures. The next day, Treasury yields soared, as investors grappled with the Federal Reserve’s seeming lack of action in curtailing inflation.

Treasury Yield Indications for Professional Investors
Despite the elevated level at present, strategists say the yield is still relatively low, particularly given the expectation for explosive economic growth this year. Regardless, correlations between Treasury yields, interest rates, economic growth and inflation can present professional traders with helpful indications of investor sentiment, as connections between each macro factor are fully understood.

Interest Rates
In the United States, the Treasury yield curve is the first mover of all domestic interest rates and an influential factor in setting global rates. Interest rates on all domestic bond categories rise and fall with treasuries. Treasury yields are the primary benchmark from which all rates are derived.

Economic Growth
Strong economic growth typically leads to increased aggregate demand, which results in increased inflation if it persists over time. In turn, Treasury yields generally rise for Treasuries to find equilibrium between supply and demand.

When inflationary pressures emerge, Treasury yields move higher as fixed-income products become less desirable. Additionally, inflationary pressures typically force central banks to raise interest rates to shrink the money supply. In inflationary environments, investors are forced to reach for greater yield to compensate for diminished purchasing power in the future.

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