Treasury yields have a large impact on the Macro economy since they influence bond rates at all durations, which in turn influences mortage rates and the stock market. Treasury yields fluctuate from day to day, but this article looks at the near-to-medium term.
In a free credit market (when the Federal Reserve is not distorting yields by massive money creation and bond buying) it’s normal for yields to rise when the economy is strengthening. A stronger economy would be a good sign for stock prices. It’s also normal for bond investors to demand higher yields when inflation is expected to remain high for the long term. The 5-Year, 5-Year Forward Inflation Expectation Rate has been range-bound at about 2.4% for the past year so the bond market apparently believes that 2022’s inflation spike won’t last 5 years. Prolonged inflation has been bad for the stock market in the past.
**Treasury Yields Rise on Bet That Recovery Will Last Longer**
**Bond prices have slipped, a sign of investor optimism regarding the economy before the Jackson Hole retreat**
**By Sam Goldfarb, The Wall Street Journal, Aug. 25, 2022**
**U.S. government-bond yields have staged a major rebound this month, reflecting increased optimism among investors about the near-term economic outlook....**
**The good news on headline inflation and caution from Fed officials have, for investors, only lowered the chances that the central bank will raise rates so aggressively in the short term that they would have to start cutting them immediately [due to causing a recession]....** [end quote]
Here’s an interesting forecasting site that uses AI (their own black box algorithms) for several important market variables. Their forecast of 3.73% for the 10 year Treasury in November is higher than the 3.5% high in mid-June 2022. The early 2022 stock market slump coincided with the rise in the bond yields and reversed when yields started to subside in mid-June.
The real (inflation-adjusted) yields of these bonds is negative and will have to rise if inflation does not subside. Anyone who thinks that inflation will stay higher than 2.5% for the long term should buy TIPS, not Treasuries, and hold to maturity to retain principal. Bond fund NAVs would sink.
Data that will swing the bond and stock market are Jerome Powell’s comments on Friday at the Woods Hole convention, the inflation rates for August and September, and the Fed’s action on the fed funds rate in September.
Meanwhile, the 30 year mortgage has climbed to 5.55%, compared with 2.87% a year ago. It’s no wonder the housing market has slowed.