Bond yields rose on Sep 19, extending the week’s climb, as investors took escalating trade related tensions in stride, and focused more on solid economic data and promising corporate outlook. The yield on the 10-year Treasury note, a benchmark for interest rates, has hit a four-month high. The Federal Reserve, in fact, has stepped up the pace of monetary tightening, with Chairman Jerome Powell vouching for a steady path of interest rate hikes.
Investors have thus exited bond proxies, including utilities, real estate, telecom, and consumer staples, to name a few. Meanwhile, banks rallied on expectations to benefit from a rise in benchmark bond yield.
Bond Yields Climb North
The 10-year Treasury note yield jumped 3.3 basis points to 3.081% on Sep 19, the highest since May 17 and close to its seven-year high of 3.109%. The 10-year note yield had crossed the coveted 3% mark on Sep 18, the first time since late May. The benchmark bond yield had exceeded the mark briefly in 2013 and January 2014, which was toward the end of the bond market wipeout, better known as the “taper tantrum.”
The 30-year bond yield also climbed 3.1 basis points to 3.236%, almost near a four-year high of 3.246%. Jeffrey Gundlach, chief executive officer of DoubleLine Capital and a renowned bond market expert, expects 6% on the 10-year yield by the next presidential election or the year after. He added that “a move soon to higher yields would be signaled by the 30-year closing two days in a row over 3.25%.” By the way, the 2-year note too changed hands at a decade high of 2.816%.
What’s Acting in Favor of Bond Yields?
Bond yields are rising, as bond prices decline. The bond market is becoming less attractive as investors continue to load up on U.S. stocks. After all, investors are shrugging off growing trade tensions between the United States and China. And why not? President Trump did build pressure on Beijing by announcing tariffs on nearly $200 billion of Chinese products in response to “unfair trade practices.” China, in the meantime, retaliated with tariffs of 5% to 10% on $60 billion worth of U.S. products. But, investors see the tariffs as less consequential than apprehended. This is because the United States did not stick to the initial 25% tariff imposition plan. China has also applied a 10% tariff on certain goods that it had earlier earmarked for a 20% levy.
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