NEW YORK (Reuters) – US Treasury yields have risen to their highest level in more than a year from record lows reached in 2020 as the Federal Reserve’s commitments to keep interest rates zero for years to come encouraged investors to bet economic growth and inflation bet.
Although yields remain low by historical standards, a rapid rise could lead to assets ranging from equities and commodities to house prices.
This is what happens there:
Why is the yield rising?
In recent months, breakthroughs in the development of COVID-19 vaccines and fiscal stimulus have raised expectations that the economy will rebound. The improved risk appetite has encouraged investors to buy riskier assets such as equities rather than bonds. Inflation expectations have also risen, causing bond prices to rise and yields to rise. The weaker demand for debt was evident in the disappointing auction of seven-year-long U.S. treasury notes that boosted yields.
Where do investors think the returns will go next?
Investors generally believe that yields will rise more in 2021, although some believe that the Fed may limit a rise in yields that it considers extreme enough to threaten economic recovery. Some analysts believe this could happen if ten-year treasury yields rise much higher than 2% without significant economic improvement.
What does the increase in returns mean for other assets?
Higher Treasury yields have made the U.S. dollar more attractive to investors seeking revenue, raising it from its three-year low in January.
On the other hand, the spot price for non-yielding gold is lower this year after outperforming almost all other assets last year.
For equities, rising returns are a mixed bag, slowing an increase in technology and other growth stocks as investors worry about the erosion of long-term cash flow for these companies. But higher returns also boosted financial stocks and accelerated the transition to other successful sectors.
How can higher treasury yields affect individuals?
The effect on individual pocket books can be seen most in the housing market. The interest rates charged at fixed interest rates tend to overshadow treasury yields and have already started moving higher.
Savings can start to see the rates rise again in savings accounts with high returns.
Reporting by Kate Duguid and Karen Brettell; edited by Megan Davies and David Gregorio