Government Bond Yields Soar as Markets Weigh Recession Threat

Government Bond Yields Soar as Markets Weigh Recession Threat

Hoxton/Sam Edwards | fake images

Bond yields rose this week after another major rate hike by the Federal Reserve, signaling a warning of market trouble.

The policy-sensitive 2-year Treasury yield rose to 4.266% on Friday, hitting a 15-year high, and the benchmark 10-year Treasury hit 3.829%, the highest in 11 years.

The sky-high returns come as markets weigh the effects of the Fed’s policy decisions, with the Dow Jones Industrial Average falling almost 600 points into bear market territory, falling to a new low by 2022.

The inversion of the yield curve, which occurs when short-term government bonds have higher yields than long-term bonds, is an indicator of a possible future recession.

More on Personal Finance:
Inflation and higher rates are a ‘dangerous mix’ for consumers
Get marry? How to know when to combine your finances
New retirees may face surcharges for Medicare premiums

“Higher bond yields are bad news for the stock market and its investors,” said certified financial planner Paul Winter, owner of Five Seasons Financial Planning in Salt Lake City.

Higher bond yields create more competition for funds that might otherwise go to the stock market, Winter said, and with higher Treasury yields used in the calculation to evaluate stocks, analysts may lower prices. expected future cash flows.

Also, it may be less attractive for companies to issue share buyback bonds, which is one way profitable companies return cash to shareholders, Winter said.

Fed hikes ‘somewhat’ contribute to higher bond yields

Market interest rates and bond prices typically move in opposite directions, meaning that higher rates cause bond values ​​to fall. There is also an inverse relationship between bond prices and yields, which rise as bond values ​​fall.

The Fed’s rate hikes have contributed to some extent to boosting bond yields, Winter said, and the impact varies along the Treasury’s yield curve.

“The further you go down the yield curve and the lower credit quality falls, the less Fed rate hikes will affect interest rates,” he said.

That’s a major reason for the inverted yield curve this year, with 2-year yields rising more dramatically than 10- or 30-year yields, he said.

Review stock and bond allocations

It’s a good time to review your portfolio diversification to see if changes are needed, such as realigning assets to match your risk tolerance, said Jon Ulin, CFP and CEO of Ulin & Co. Wealth Management in Boca Raton, Fla. .

On the bond side, advisers look at so-called duration, or measure the sensitivity of bonds to changes in interest rates. Expressed in years, coupon duration factors, time to maturity and yield paid over the term.

Above all, investors need to be disciplined and patient, as always, but more specifically if they believe rates will continue to rise.

paul winter

owner of Five Seasons Financial Planning

While clients welcome higher bond yields, Ulin suggests keeping durations short and minimizing exposure to long-dated bonds as rates rise.

“Duration risk can wipe out your savings for the next year, regardless of sector or credit quality,” he said.

Winter suggests tilting stock allocations toward “value and quality,” typically trading for less than the asset is worth, rather than growth stocks that are expected to deliver above-average returns. Value investors often look for undervalued companies that are expected to appreciate in value over time.

“Above all, investors need to be disciplined and patient, as always, but more specifically if they believe rates will continue to rise,” he added.

Leave a Comment

Your email address will not be published.