NEW YORK – Yes, it’s possible to have too much of a good thing, and that’s exactly why stock markets around the world are getting so unsettled.
Optimism for an economic revival is surging following a year of coronavirus-induced misery. But expectations for stronger growth — plus the higher inflation that could accompany it — are pushing interest rates higher, which is forcing investors to re-examine how they value stocks, bonds and every other investment.
When it tries to figure out the value for anything from Apple’s stock to a junk bond, the financial world starts by comparing it against a U.S. Treasury bond, which is what the government uses to borrow money. For years, yields have been ultralow for Treasurys, meaning investors earned very little in interest for owning them. That in turn helped make stocks and other investments more attractive, driving up their prices. But when Treasury yields rise, so does the downward pressure on prices for other investments.
All eyes have been on the yield of the 10-year Treasury note, which climbed above 1.50% this week after starting the year around 0.90%. Here’s a look at why that move shook up the financial world, including the worst week for the Nasdaq composite since October:
WHY ARE TREASURY YIELDS RISING?
Part of it is rising expectations for inflation, perhaps the worst enemy of a bond investor. Inflation means future payments from bonds won't buy as many bananas, minutes' worth of college tuition or whatever else is rising in price. So bond prices tend to fall when inflation expectations are rising, which in turn pushes up their yields.
Treasury yields also often track with expectations for the economy’s strength, which are on the rise. When the economy is healthy, investors feel less need to own Treasurys, considered to be the safest possible investment.
WHY DO FALLING BOND PRICES MEAN RISING YIELDS?