Interest rates are moving higher. The latest sign is the fact that the yield on the 10-year Treasury bond touched 3% Thursday morning. Signs of continued growth in the U.S. economy (3Q GDP up at an annualized rate of 4.1%) and optimism regarding the near-term future have lowered the demand for U.S. Treasury notes, which has pushed the yield on 10-year Treasury notes up above a 3% for the first time since mid-2011.
Treasury yields at historic lows just months ago
U.S.Treasury yields were at record lows back in May, with 10-year yields dropping as low as 1.63%. Unemployment rates had barely begun to slip by Spring, and there were real concerns about the stability of the Eurozone at the time as well. A slew of good economic news over the next seven months, including a string of increasingly positive employment reports, has completely reversed sentiment, and led to renewed optimism about the health of the U.S. (and European) economy. This means less demand for safe haven investments such as government bonds, which in turn drives up the yield on the instruments.
Rising rates are a double-edged sword
Scott Anderson, chief economist at Bank of the West, points out that rising rates are a mixed blessing. “If long-term interest rates rise too rapidly, we could see stronger headwinds develop in housing, autos and business spending, (which) could temper our optimistic economic outlook,” says Anderson. “Gradual rate increases that are matched by stronger sales, and improved investment opportunities are not as concerning as interest rates that are on the rise because the Fed is no longer a major buyer in the U.S. Treasury market.”
Despite some stock pundits’ predictions, equity investors have largely shrugged off rising interest rates and remained focused on the signs of a stronger economy. The Fed has also made it clear that they will remain accommodative, despite finally beginning the long-awaited taper last week. The Fed has also committed to continuing the taper and terminating its bond-buying program in the not-too-distant future, but nothing seems to phase stock buyers as the Dow Jones Industrial Average (INDEXDJX:.DJI) is up again today after notching its 49th record high of the year on Tuesday.