Bond yields are soaring all over the world – in some places to the highest levels seen in decades.
In Europe, longer-dated yields are rising across France, Germany, and the United Kingdom. In some instances, borrowing costs hit the highest level since 1998. Japan’s 10-year yield on government debt just hit the highest level in three decades.
And the U.S. isn’t being spared. The interest rate on 30-year Treasury bonds hit the highest level since 2007.
This increase in rates is a continuation of an uptrend unfolding over the past couple of years… and it could only be the start.
Here’s why it matters for your portfolio if higher rates are here to stay…
The rise in interest rates is taking out key levels, especially on the longer end of the yield curve.
The 30-year Treasury yield broke above the 5.15% level in July, and the move is only accelerating. Here’s the chart below:
I’ve been waiting for investors to finally start noticing rising interest rates. The move can hurt investor portfolios in a couple of ways.
Bonds are a core holding in retirement portfolios and are supposed to provide diversification. But remember that bond prices fall when yields are rising.
Rising rates can also pressure the stock market. Rising rates diminish the value of future profits. Investors can quickly rethink how much they should be paying for a stock, especially when valuations are elevated.
Higher rates can also draw funds away from stocks. When interest rates are on the rise, that means investors can earn a higher rate of return on bonds, so bonds start competing with stocks for investors’ money.
As rates keep rising, investors are finally starting to show some concern.
But the jump in interest rates could still be in the early stages. A perfect storm of catalysts is coming together at the same time…
Several catalysts can spark a move higher in interest rates. Inflation and problems with the state of government finances are two big ones. And right now, both are hitting at the same time.
Inflation pressures are emerging all over the place. The most obvious price impact is coming from geopolitical conflicts in key energy regions. That includes the ongoing war between Russia and Ukraine as well as hostilities in the Middle East impacting the flow of energy products.
The AI infrastructure buildout is inflationary as well. Copper prices are hovering near record highs, and companies like Apple and Tesla are warning about rising prices for consumer products as a result of semiconductor shortages.
Then there’s spiraling fiscal spending all over the world. The U.S. is projected to run a budget deficit of $1.9 trillion this year – about 6% of GDP, a level rarely seen when economic times are good.
That comes at a time when the federal debt relative to the size of the economy tops 120%. That’s the highest level since coming out of World War II.
Putting it all together, there’s a perfect storm of catalysts coming together to spark an increase in interest rates.
While investors are already starting to fret over the latest increases, it could just be the beginning.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
