A selloff in U.S. government bonds is triggering a domino effect across various financial sectors, from stocks to real estate. This seismic shift comes as investors hurriedly recalibrate their portfolios in response to Treasury yields soaring to their highest levels in over 15 years.
The Treasury Yields
The benchmark 10-year U.S. Treasury yields, inversely related to prices, are hovering at levels last witnessed in 2007. The driving forces behind this selloff include a hawkish stance from the Federal Reserve and mounting fiscal concerns, setting the stage for what could be an unprecedented third consecutive annual loss for Treasuries, as noted by Bank of America Global Research.
The $25-trillion Treasury market, often considered the cornerstone of the global financial system, is experiencing widespread repercussions due to the surge in U.S. government bond yields. The S&P 500 has dipped by approximately 8% from its annual highs, as the allure of guaranteed yields on U.S. government debt diverts investors away from equities. Concurrently, mortgage rates have reached more than 20-year highs, exerting downward pressure on real estate prices.
Impact on Markets
The ramifications of rising yields are evident across multiple market segments. Elevated Treasury yields have tempered investors’ enthusiasm for stocks and other high-risk assets by tightening financial conditions and increasing the cost of credit for both companies and individuals.
Furthermore, rising yields have dimmed the attractiveness of equities, particularly impacting high-dividend paying stocks in sectors like utilities and real estate. Tech and growth companies, whose future profits are discounted more significantly against higher yields, are also feeling the brunt of this market shift.
The surge in yields has triggered a rebound in the U.S. dollar, which has appreciated by an average of 7% against its G10 counterparts since mid-July. This stronger dollar, while tightening financial conditions, poses challenges for U.S. exporters and multinationals and complicates global efforts to control inflation by pushing down other currencies.
In the housing market, the interest rate on the 30-year fixed-rate mortgage, the most popular U.S. home loan, has soared to its highest level since 2000. This surge has dented homebuilder confidence and applied pressure on mortgage applications, presenting a notable exception in an otherwise robust economy characterized by a strong job market and vigorous consumer spending.
As Treasury yields surge, credit market spreads have widened, with investors demanding higher yields on riskier assets like corporate bonds. The widening credit spreads are adding to funding costs for prospective borrowers.