The yield on the 10-year U.S. government bond hit three per cent for the first time in four years on Tuesday, pushed up by expectations of higher inflation to come.
The benchmark 10-year bond briefly yielded three per cent on Tuesday morning, before dipping back to 2.99 per cent. For comparison purposes, Canada’s 10-year government bond was yielding just over 2.3 per cent on Tuesday morning.
Since the global financial crisis in 2008-09, a combination of low inflation expectations and a bond-buying program by the Federal Reserve have helped keep bond yields low, but they have climbed this year as inflation has picked up and the Fed raised interest rates. With the Fed no longer buying bonds and investors expecting greater inflation, analysts say higher yields could make bonds more attractive.
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Bond yields move higher as bond prices move lower. And bonds and stocks tend to move in opposite directions, too, so the new threshold in a benchmark bond yield bears watching.
But there’s nothing necessarily triggering about the new level.
“The more interesting move is, if we’ve hit three per cent, does that open the flood gates?” Rabobank rates strategist Lyn Graham-Taylor said.
“[Three per cent] really is just a psychological level,” says Joey Mack, director of fixed income with GMP Securities. “I don’t think is really all that significant in terms of the impact on growth and risky markets such as equities.”
The increase in bond yields is largely based on an expectation of higher inflation to come, which is itself based on a steadily improving economy. That’s why Mack says “consensus forecasts are calling for 3.25 per cent by the end of the year … seem very reasonable.”
But low interest rates have helped juice the economic recovery, so a return to higher rates could signal tougher times ahead.
Stocks indeed moved lower on Tuesday, with the Dow Jones industrial average down by as much as 619 points at one point, before finishing the day with a loss of 424.56 points, or 1.7 per cent, at 24,024.13.
The Nasdaq composite dropped 121.25 points, or 1.7 per cent, to 7,007.35, while the S&P 500 index sank 35.73 points, or 1.3 per cent, to 2,634.56.
On Bay Street, the S&P/TSX composite index finished at 15,477.00, down 75.06 points.