Rising yields are largely a good sign for the economy, but bondholders are paying for robust growth—and there might be more pain to come
The worst bond rout in decades shows few signs of abating, threatening further pain for both investors and borrowers.
Rising Treasury yields are in many ways a reflection of a robust economy. A big reason why many investors expect continued high inflation in the near term is that households are flush with cash and eager to spend their money on travel and leisure activities as they begin to worry less about the Covid-19 pandemic. The labor market is also, by some measures, the, giving workers leverage to demand better wages and confidence that they can always find a different job if they lose their current one.
Treasury yields largely reflect expectations for short-term rates over the life of a bond. They in turn set a floor on borrowing costs across the economy. The Fed, now, wants borrowing costs to rise to slow consumer demand and bring down inflation—and it is succeeding at least in the first of goals, with the average 30-year mortgageWhile rising yields are tough for investors, there were, analysts said, some glimmers of hope in the latest inflation report.
One hope of some bond investors is that surging consumer prices, coupled with higher borrowing costs, could slow consumer demand in relatively short order. In that case, the Fed could keep tightening monetary policy, but officials wouldn’t feel the need to raise their rate forecasts further, allowing bond yields to stabilize.
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