Stocks fall and mortgage rates rise: How 5% Treasury yields could roil markets

NEW YORK (Reuters) – A sustained sell-off in U.S. government bonds has sent Treasury yields to their highest level in more than a decade and a half, rattling everything from stocks to the real estate market.

The yield on the benchmark 10-year Treasury note – which moves inversely with prices – briefly reached 5% late Thursday, a level last seen in 2007. Expectations that the Federal Reserve will keep interest rates high and US financial concerns grow Among the factors driving the economy to rise. It moves.

Because the $25 trillion Treasury market is the bedrock of the global financial system, rising yields on US government bonds have had widespread effects. The S&P 500 index is down about 7% from this year’s highs, as the promise of guaranteed returns on US government debt scares investors away from stocks. Meanwhile, mortgage rates are at their highest levels in more than 20 years, affecting real estate prices.

“Investors should take a hard look at risky assets,” said Gennady Goldberg, head of US interest rates strategy at TD Securities in New York. “The longer we stay at higher interest rates, the more likely it is that something will collapse.”

Federal Reserve Chairman Jerome Powell said Thursday that monetary policy does not look “too tight,” strengthening the case for those who believe interest rates are likely to remain high.

Powell also pointed to the “term premium” as a driver of returns. The premium is the additional compensation investors expect for owning long-term debt and is measured using financial models. One Fed chair recently cited its rise as a reason the Fed might have less need to raise interest rates.

Here’s a look at some of the ways the rise in yields has been echoed across markets.

Higher Treasury yields can curb investors’ appetite for stocks and other risky assets by tightening financial conditions because they raise the cost of credit for businesses and individuals.

Elon Musk warned that higher interest rates could sap demand for electric vehicles, sending shares in the sector lower on Thursday. Tesla shares closed today down 9.3%, as some analysts questioned whether the company would be able to maintain the rampant growth that has distinguished it for years from other automakers.

As investors gravitate toward Treasuries, with some maturities now offering well above 5% to investors who hold bonds to term, high-dividend stocks in sectors such as utilities and real estate have been among the hardest hit.

The US dollar has advanced about 6.4% on average against its G10 counterparts since the rise in Treasury yields accelerated in mid-July. The dollar index, which measures the dollar’s strength against six major currencies, stands near its highest level in 11 months.

A stronger dollar helps tighten financial conditions and could hurt the balance sheets of US exporters and multinational companies. Globally, this complicates other central banks’ efforts to reduce inflation by pushing their currencies lower.

For several weeks, traders have been anticipating possible intervention by Japanese officials to combat the continuing decline in the value of the yen, which has fallen 12.5% ​​against the dollar this year.

“The US dollar’s ​​correlation with interest rates has been positive and strong during the current policy tightening cycle,” Athanasios Vamfakidis, global research strategist at Bank of America, said in a note on Thursday.

Interest rates on thirty-year fixed-rate mortgages—the most popular home loan in the United States—have risen to their highest levels since 2000, hurting homebuilder confidence and pressuring mortgage applications.

In a resilient economy characterized by a strong labor market and strong consumer spending, the housing market has emerged as the sector most affected by the Federal Reserve’s aggressive measures to cool demand and undermine inflation.

Existing home sales in the United States fell to a 13-year low in September.

As Treasury yields rise, credit market spreads widen as investors demand higher returns on riskier assets such as corporate bonds. Credit spreads exploded after the banking crisis this year, then narrowed in subsequent months.

However, rising yields pushed the ICE BofA High Yield Index (.MERH0A0) to its highest level in four months, increasing financing costs for potential borrowers.

Volatility in US stocks and bonds has increased in recent weeks as expectations about Federal Reserve policy have shifted. The expectation of a rise in the US government spending deficit and the issuance of debt to cover these expenses also caused concern among investors.

The MOVE (.MOVE) index, which measures expected volatility in US Treasury bonds, is approaching its highest levels in more than four months. Volatility in stocks also rose, sending the Cboe Volatility Index (.VIX) to a five-month high.

(This story has been reworded to add the word “briefly” in paragraph 2)

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