Graphic: Falling stocks, climbing mortgage rates: how 5% Treasury yields could roil markets

Applied Energetics

20/10/2023 01:25

(Adds link, changes headline)
    By Saqib Iqbal Ahmed
       NEW YORK, Oct 19 (Reuters) - Relentless selling of U.S.
government bonds has brought Treasury yields to their highest
level in more than a decade and a half, roiling everything from
stocks to the real estate market.
    The yield on the benchmark 10 year Treasury - which moves
inversely to prices - hit 5% late Thursday, a level last seen in
2007. Expectations that the Federal Reserve will keep interest
rates elevated and mounting U.S. fiscal concerns are among the
factors driving the move. 
    Because the $25-trillion Treasury market is considered the
bedrock of the global financial system, soaring yields on U.S.
government bonds have had wide-ranging effects. The S&P 500 is
down about 7% from its highs of the year, as the promise of
guaranteed yields on U.S. government debt draws investors away
from equities. Mortgage rates, meanwhile, stand at more than
20-year highs, weighing on real estate prices. 
    "Investors have to take a very hard look at risky assets,"
said Gennadiy Goldberg, head of U.S. rates strategy at TD
Securities in New York. "The longer we remain at higher interest
rates, the more likely something is to break."
    Fed Chairman Jerome Powell on Thursday said monetary policy
does not feel "too tight," bolstering the case for those who
believe interest rates are likely to stay elevated.  
    Powell also nodded to the "term premium" as a driver for
yields. The term premium is the added compensation investors
expect for owning longer-term debt and is measured using
financial models. Its rise was recently cited by one Fed
president as a reason why the Fed may have less need to raise
rates.
    Here is a look at some of the ways rising yields have
reverberated throughout markets.
    
    Higher Treasury yields can curb investors' appetite for
stocks and other risky assets by tightening financial conditions
as they raise the cost of credit for companies and individuals.
    Elon Musk warned that high interest rates could sap
electric-vehicle demand, which knocked shares of the sector on
Thursday. Tesla’s shares closed the day down 9.3%, as some
analysts questioned whether the company can maintain the runaway
growth that has for years set it apart from other automakers.
    With investors gravitating to Treasuries, where some
maturities currently offer far above 5% to investors holding the
bonds to term, high-dividend paying stocks in sectors such as
utilities and real estate have been among the worst hit.
    
    
    The U.S. dollar has advanced an average of about 6.4%
against its G10 peers since the rise in Treasury yields
accelerated in mid-July. The dollar index, which measures the
buck’s strength against six major currencies, stands near an
11-month high.  =USD 
    A stronger dollar helps tighten financial conditions and can
hurt the balance sheets of U.S. exporters and multinationals.
Globally, it complicates the efforts of other central banks to
tamp down inflation by pushing down their currencies.
    For weeks, traders have been watching for a possible
intervention by Japanese officials to combat a sustained
depreciation in the yen, down 12.5% against the dollar this
year.
    "The correlation of the USD with rates has been positive and
strong during the current policy tightening cycle," BofA Global
Research strategist Athanasios Vamvakidis said in a note on
Thursday.
        
    The interest rate on the 30-year fixed-rate mortgage - the
most popular U.S. home loan - has shot to the highest since
2000, hurting homebuilder confidence and pressuring mortgage
applications.
    In an otherwise resilient economy featuring a strong job
market and robust consumer spending, the housing market has
stood out as the sector most afflicted by the Fed's aggressive
actions to cool demand and undercut inflation. 
    U.S. existing home sales dropped to a 13-year low in
September.
    
    As Treasury yields surge, credit market spreads have widened
with investors demanding a higher yield on riskier assets such
as corporate bonds. Credit spreads blew out after a banking
crisis this year, then they narrowed in subsequent months.
    The rise in yields, however, has taken the ICE BofA High
Yield Index  .MERH0A0  near a four-month high, adding to funding
costs for prospective borrowers.

    Volatility in U.S. stocks and bonds has bubbled up in recent
weeks as expectations have shifted for Fed policy. Anticipation
of a surge in U.S. government deficit spending and debt issuance
to cover those expenditures has also unnerved investors.
    The MOVE index  .MOVE , measuring expected volatility in
U.S. Treasuries, is near its highest in more than four months.
Volatility in equities has also picked up, taking the Cboe
Volatility Index  .VIX  to a five-month peak.

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GRAPHIC: Stocks feel the burn    https://tmsnrt.rs/3tC30tT
GRAPHIC: King dollar    https://tmsnrt.rs/45GhaHE
GRAPHIC: Mortgage mayhem    https://tmsnrt.rs/3FqgDPK
GRAPHIC: Widening spreads    https://tmsnrt.rs/3S4K6Ga
GRAPHIC: On the MOVE    https://tmsnrt.rs/401qZPc
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 (Reporting by Saqib Iqbal Ahmed; Writing by Ira Iosebashvili;
Editing by Stephen Coates)
 ((Ira.Iosebashvili@thomsonreuters.com;))