NEW YORK – Interest rates keep marching higher, and Wall Street keeps shaking because of it.
The yield on the 10-year Treasury climbed back above 1.50% Thursday, prodded higher by comments by the Federal Reserve's chair, and it helped send stocks on Wall Street on another slide. The speed at which the yield has climbed has forced investors to re-examine how they value stocks, bonds and every other investment. And the immediate verdict has been to sell them at lower prices, particularly the most popular investments of the last year.
Yields have been climbing with optimism for an economic revival following a year of coronavirus-induced misery, along with expectations for the higher inflation that could accompany it. That's key because those yields form the bedrock that the financial world uses to try to figure out the value for anything from Apple’s stock to a junk bond.
For years, yields have been ultralow for Treasurys, meaning investors earned very little in interest for owning them. That in turn made 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. Here’s a look at why the recent moves have been so rocky:
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 much – because the price of a banana or a bouquet of flowers will be higher than it is today. So when inflation expectations rise, bonds are less desirable, and their prices fall. That pushes up their yield.
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?