Bond yields have been rising quickly this month, spooking investors on Wednesday. Stocks have rebounded since then, but still look to finish the week slightly lower.
Rising yields typically mean falling bond prices. In the first part of the year, yields were rising (blue) and the bond market was struggling with losses due to lower prices (red). However, yields reversed in the spring and began falling as the path of Fed rate cuts beginning in the fall became clearer. This sparked a rally in the bond market through the summer that erased the losses from earlier in the year.
The spike in yields since the beginning of October is likely due to a couple of things:
- Fiscal year 2024 (FY24) for the US government ended on September 30th and some sobering numbers were finalized this month. Interest on the debt was $950 billion, up 34% from FY23. Interest expense is now the second largest budget item behind Social Security ($1.5 trillion) and ahead of defense ($869 billion). When lenders (bond buyers) become more concerned with the creditworthiness of the borrower (US government), then lenders demand a higher yield to be compensated for the additional risk of loaning money (buying bonds).
https://taxfoundation.org/blog/federal-budget-deficit-tcja-revenue-spending/
- Presidential candidates continue promising tax cuts, debt forgiveness (actually debt transfer to the national debt), and increased government spending with very little discussion of getting our economic house in order. In light of #1, this is making some investors nervous enough to demand higher yields or avoid fixed income (bonds) altogether.
https://finance.yahoo.com/news/paul-tudor-jones-roads-lead-154124195.html
- The economy remains healthy and the 0.50% Fed interest rate cut in September boosted confidence in the near-term. Corporate earnings are good and the odds of a recession soon have diminished. With the prospect of better stock market returns, investors demand more compensation (higher yield) to loan money (buy bonds) since they have good alternatives in which to invest.
So, bond yields seem to be spiking due to increasing confidence in the short-term view for stocks and decreasing confidence in the longer-term view of the economy.
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
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