In a bad sign for stocks, bond yields in the U.S. are continuing to rise, with the 10-year bond now at its highest level since 2007, which was before the global financial crisis and Great Recession that followed.
Bond yields have been rising sharply since Sept. 20 when U.S. Federal Reserve Chair Jerome Powell said that a further interest rate increase this year is likely, and signaled that rates are likely to remain higher for longer than markets had priced in. The spike in bond yields coincides with a global selloff in equities as traders and investors adjust to the new outlook put forward by the U.S. central bank.
Bond Yields at Decade Highs
Investors have become rattled by Powell’s latest forecast of at least one more rate increase this year, followed by two rate cuts in 2024. Previously, futures markets had expected no further rate increases in 2023 and up to four rate cuts in 2024. Consequently, stocks are being sold, and investors are moving into cash and bonds, which are viewed as less risky than equities.
Yields on U.S. Treasuries are now at their highest levels in more than a decade. The 30-year Treasury bond yield has risen to its highest level since 2011, while the 10-year Treasury yield is at its highest position since 2007. The two-year bond yield has reached its highest peak since 2006. The spike in bond yields comes as all three major U.S. stock indices, the Dow, Nasdaq, and S&P 500, look set to finish the current third quarter in the red.
Yield Curve Inversion
The bond market’s yield curve has now been inverted for 14 consecutive months. Yield curve inversions are typically viewed as a sign of an impending recession, although none has yet occurred despite interest rates sitting at a 22-year high. The latest economic data shows that the U.S. economy remains in decent shape. Jobless claims issued in recent days were weaker than forecast, indicating that the American economy remains stronger than many economists had expected, given how high interest rates are right now.
While a recession has been avoided so far, there are many economists who are still forecasting that one will arrive in the first half of next year. That likelihood increases should the Fed follow through on Powell’s comments and actually raise the trendsetting Fed Funds Rate above its current range of 5.25% to 5.50%. Powell and other Fed officials have said that they want to see a softening in the labor market before they feel confident ending the current cycle of interest rate hikes.
What’s Next
Bond yields look likely to continue rising with investors nervous and offloading stocks. Activity in both the bond and equity markets might calm down in the coming weeks if additional economic data shows that the U.S. economy, and especially inflation, is starting to cool off. Any data that might give the Fed cause to reconsider and hold off on further interest rate increases would be welcomed news and could help to calm markets that remain on edge around the world.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
