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Impact of Treasury Yields on Stock markets

Team Veye | 06 Feb 2018

Impact of Treasury Yields on Stock markets

Treasury yield is the return on investment which is usually expressed as a percentage, on a government's debt obligations. Looked at another way, it is the interest rate that the government pays to borrow money for different lengths of time.

 

Treasury yields not only influence how much the government pays to borrow and how much investors earn by investing in this debt, they also influence the interest rates that individuals and businesses pay to borrow money make purchases in areas like real estate, vehicles, and equipment. Treasury yields also indicate how investors feel about the economy. The higher the yields on 10, 20 and 30year Treasuries, the better the economic outlook.

 

When the government needs to raise capital to source projects, it issues debt instruments through its Treasury. The types of debt instruments that the government issues include Treasury bills or T-bills, Treasury notes or T-notes, and Treasury bonds or T-bonds, which come in different maturities up to 30 years. The T-bills are short-term bonds that mature within a year, the T-notes have maturity dates of 10 years or less, and the T-bonds are long-term bonds that offer maturities of 20 and 30 years.

 

The reason that we often see the yields on Treasuries fall when you see a financial crisis in an emerging or foreign market is due to flight to quality. A flight to quality occurs when market participants move their money from high risk/low quality investments to low risk/high quality investments, which is usually triggered by an event in the higher-risk market. 

 

When there is a crisis in the emerging markets, such as a geopolitical problem or a financial meltdown, we may often see the market participants in that market sell out and move their money to a safer place. And, one of the safest places is in Government Treasuries - government backed debt instruments. As money flows into Treasuries their prices rise, which leads to a decrease in yields. 

 

With bonds, the price of a bond and its yield has an opposite relationship with each other. Generally, the reason for this is that no matter what happens to the price of the bond over its life, it will still pay the same amount in coupons. Therefore, when the price rises the percentage of this pay-out or yield, to the price of the bond will decrease.

 

Treasury yields are a source of investor concern all over the globe. Treasury yields are the primary benchmark from which all rates are derived because Treasury notes are considered the safest asset in the world. For eg, Given the depth and resources of the U.S. government, when the Federal Reserve lowers the interest rate, it creates additional demand for Treasuries, since they can lock in money at a specific interest rate. This additional demand for Treasuries leads to lower interest rates.

 

Recently, the 10-year Treasury yield in US has jumped to a four-year high on the back of a better-than-expected jobs report reflected rising wages. Yields also got a boost from higher-than-expected consumer confidence numbers as investors began to bet on accelerating inflation from this growing economy.

 

As per the recent update from the U.S. Labor Department, the U.S. economy added 200,000 jobs in Jan'18, topping economist expectations of 180,000 jobs added. 

 

As per the latest update, the 30 year Treasury bond yield touched 3.07% and 10 year note was up at 2.83% following the report. The rising yields raised concern such high borrowing costs derail the economy. The S&P 500 finished its lowest week since February 2016 on 2nd Feb’18, while the Dow Jones fell 665 points that amounts to a 2% dip perceived as really steep.

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