Have you noticed that long-term U.S. interest rates have been inching upwards even as the Federal Reserve holds its short-term target at 0% to 0.25%?
Yields on the 10-year Treasury bond finished last week at 3.95% on Friday, April 2. That’s within an eyelash of the psychologically important 4% barrier last breached in June 2009.
I put the climb in long-term interest rates down to three causes.
First, good news on the U.S. economy in Friday’s jobs number. The U.S. economy added 162,000 jobs in March. Bond yields rise when the economy looks like it’s picking up speed because bond investors fear, usually correctly, that faster growth will mean higher inflation.
Second, worrying news on global inflation and rising interest rates from Brazil to India. Commodity prices are climbing for everything from iron ore to oil. And inflation is kicking up in world emerging markets and central banks there have begun raising interest rates. That means U.S. rates have to rise to stay competitive: The U.S. needs to keep overseas bond buyers buying if it is to fund its huge deficit.
And, third, buyers haven’t fallen all over themselves to snap up U.S. bonds in the last few auctions. And the fear is that this week’s auctions of $82 billion in bonds won’t go any better.
We’re not anywhere near a buyers strike but although bidders are stepping up to buy U.S. Treasuries they’re not bidding prices up and yields down.
This week’s big sales start with an auction of $8 billion in 10-year TIPS (Treasury Inflation Protected Security) and $40 billion in three-year notes on Tuesday. Wednesday will see auctions for another $21 billion in 10-year notes. Thursday finishes the week with an auction of $13 billion in 30-year bonds.
That’s a lot of supply for the market to swallow all at once. And it’s not as if these auctions represent the last Treasuries that the U.S. government will sell this year.
I think we’re going to see that 4% barrier tested very soon.
And in case you’ve forgotten rising interest rates aren’t good for stocks.
As interest rates rise, as they certainly will, how will that effect dividends and pricing on dividend heavy equities?
ntack5 — While TIPS can be a good idea, the last 10-year TIP has an interest rate of 1-3/8%, not the 4% of regular Treasury bonds. In addition to the interest, TIPS have inflation protection which increases your principal based on the CPI. However, both the interest and the inflation protection are taxable income.
It appears that there are a lot of people that are not expecting inflation but are instead worried about the stock market –so far this year investors have put about $91 billion of new cash into bond mutual funds, $24 billion into international stock mutual funds and less than $3 billion into US stock funds (see, http://online.wsj.com/article/SB10001424052748704300004575095951599990806.html?mod=googlenews_wsj). If interest rates do start climbing, we may see a lot of the money that went in to bonds looking for a new home.
I’ve heard people be critical of TIPS because they didn’t trust the inflation numbers reported…
Sooner or later interest rates will go up. Who wants to buy the US debt, when everyone thinks that inflation is just around the corner, and that the budget deficit is not manageable? Europe was able to save Greece (for now), but can the rest of the world save the US? I am not sure …
Is there really anyone out there that thinks interest rates arent going to go up? That said, a certain expectation for rising rates should already be factored in to the current market.
A rise in interest rates means that The fed is not buying up the debt.
If they want to hold down interest rates, they need only buy the debt themselves, then control inflation by higher unemployment rates.
Then simply direct the massive amounts of resulting money into the stock market, rather than into the domestic economy. The result could be a rising stock market in the face global interest rate hikes, with high unemployment with a declining dollar.
X
my theroy only, jubak is probably correct. Tho I’d bet they will not allow the major markets to drop below the 200 day on the weekly,, because they went to too much trouble to drive them up there.
ntack
I for one would not advise putting much into treasuries. 4% may look OK now, but in an inflationary environment that seems VERY likely, you would be, as you say, locked into that 4%.
I haven’t looked, but I imagine TIPS are already starting to get a little pricey.
Jim,
WSJ is reporting the 4% yield mark on treasuries was hit as of this morning with $82 billioin in treasuries still on the selling block. How does this change our investment strategy?
For those who are 10-12 years from retirement, would it make sense to start locking up to 30% of our portfolio into Treasuries (or TIPS) over the next couple of years? 4% isn’t too bad for a very low risk, gurantee.
Jim,
Considering the low volume in the rising stock market over the past few weeks, how much of an effect can rising bond yields have? In times past, I’d agree with your statement, but the equity markets aren’t behaving normally.