Bond yields measure the return investors earn for lending money to governments or companies, and when yields rise, existing bond prices fall.
Many factors can affect bond yields, so here is what to know about recent moves:
• Interest rates have risen in general this year not necessarily because of inflation, but due to positive growth trends and spending in areas like AI. This is why yields have risen even as the stock market has reached new all-time highs. This is in contrast to periods like 2022 when inflation caused rates to rise and the stock market to fall.
• Concerns about government debt levels are weighing on bond markets. The U.S. national debt has exceeded $40 trillion for the first time, with an annual deficit projected to reach $2.1 trillion. Heavily indebted countries, including Japan and across Europe, have seen the sharpest yield increases. The U.S. Treasury Department has also helped to intervene in global bond and currency markets, including supporting Japan's bonds, in order to maintain a ceiling on Treasury yields.
• Global central banks are expected to raise rates. In the U.S., this is due to persistent inflation already running above the Fed’s 2% target, with the PCE price index at 3.7% year-over-year as of July. Fed Chair Kevin Warsh's latest speech at Jackson Hole raised the odds of rate hikes based on federal funds futures.
• A surge in corporate bond issuance is absorbing liquidity and demand for bonds, with issuance tied to artificial intelligence investment. Recent data from the Census Bureau shows that data center construction spending reached an annualized $75 billion in July. All of this competes with government bonds for investor demand.
• Most recently, bonds are also reacting to new strikes by the U.S. on Iran, which further affects oil prices. Brent crude has jumped back above $90 per barrel recently, which raises more questions about consumer prices in the coming months.
• Rising yields put downward pressure on bond prices. The Bloomberg U.S. Aggregate Index, a measure of the overall bond market, is now flat-to-negative on the year. At the same time, higher yields are positive for investors seeking income from their portfolios. The average yield on the Treasury securities sub-index is now 4.7%, well above the 2.2% average since 2009. So, bonds still play an important role in balanced portfolios.
While rising yields can raise concerns, keeping a long-term perspective and maintaining a balanced portfolio is still the best way to navigate these market conditions.
