Market News Updates: 10 Years Treasury Yields surge and the rise of interest rate by 0.25%
On March 1, the 10-year Treasury yield rose beyond 4% due to persistent inflation and concerns about rising interest rates, signaling a new acceleration of the historic bond market collapse. The increase brought last year’s decade-plus highs for the primary indicator of borrowing costs back into reach. The expectations for inflation to drop below the Federal Reserve’s 2% target have failed. By providing constant payouts with minimal risk, rising yields drive up borrowing costs for consumers and businesses and lower the value of other investments. Major stock indices have been impacted by the rise in rates, with the S&P 500 losing about 2.6% in February. Moreover, the recent increase in yields has started to affect other debt markets, including the junk-bond market, and denting stock values. This has increased the yield on bonds with investment-grade ratings. It increases the cost of financing for those corporations and, on the fringe, poses a threat to the viability of the market for smaller, weaker enterprises.
Notably, the two-year Treasury yield, which is particularly sensitive to Fed rate predictions, increased even more quickly in February when the 10-year yield increased. This is called an inverted yield curve which is a scenario when short-term Treasury bonds have greater yields than long-term bonds. To offset the risk of future unforeseen spikes in inflation and interest rates, longer-term Treasury bonds normally yield more than shorter-term notes. Because they reflect the belief that the Fed would need to cut rates soon to cushion a slowing economy, inversions frequently warn investors that a recession is imminent. Typically, the inverted yield curve often has two economic explanations: either there will be a soft landing(increase in unemployment but no recession) or there will be a hard landing(recession). However, in both situations, the yield will fall, and the price will go up, making now an ideal moment to buy bonds. The yield will continually climb, particularly after the Fed raised its rate to 4.75%-5% on Wednesday. The recent bank turbulence provides the clearest indication yet of the negative effects of increased interest rates on the whole economy. The turbulence has served as a sobering reminder of the dangers Fed officials, regulators, Congress, and the White House face when attempting to control inflation, which rocketed to a 40-year high last year. However, facing the recent increase in Fed rate and to allay concerns about a wider contagion, the Fed has dramatically increased financing to banks, including through a new facility with more benevolent terms. Even nevertheless, lending is probably going to slow down as a result of the banking sector’s shocks since banks will be under more scrutiny from bank inspectors and their own management teams to cut back on risk-taking.
