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.