Just recently, long term bond yields have been on the rise. Specifically, ten year Treasury bond yields just hit a five month high on Monday, March 19, 2012. (Late October 2011 was the last time it was higher.) Despite this recent yield hike, almost no one is talking about it. However, if this rising trend continues for much longer, worried investors will certainly be talking about it. Although the stock market has yet to factor in these higher yields, you can bet that the ever rising stock market will be slowed if this trend continues.
The chart below by FactSet shows the ten year yield for the last 3 months. What may be causing this trend and what does it mean?
Higher yields indicate either that:
- Investors are factoring in “evidence” that the U.S. economy may be recovering – With recovery beliefs, investors are willing to incur more risk and higher yields are needed to attract their money.
- Inflation expectations are increasing – For example, the recent hike in oil prices likely have heightened inflationary concerns that generally coincide with an economic recovery.
Higher yields are not always good in a fragile economy though. A sudden increase in Treasury yields could slow the economy by increasing the price of credit (e.g., mortgages) that is linked to the ten year note. It is unclear if this current upward trend will continue.
In my view, inflationary concerns have been mounting for quite some time. See recent blog posts and links to articles here describing how inflation rate might be much higher than the government statistics report. Most of these inflationary concerns have nothing to do with an economic recovery belief. Rather, most of these concerns relate to The Federal Reserve printing historic amounts of money. Most of these monies have yet to be circulated into the economy.