How a 5% US benchmark Treasury yield could further roil markets
© Reuters. FILE PHOTO: Traders work on the floor of the New York Stock Exchange in New York City, U.S., August 29, 2023. REUTERS/Brendan McDermid
Because the $25-trillion Treasury market is considered the bedrock of the global financial system, soaring yields on U.S. government bonds have had wide-ranging effects. Theis down about 7% from its highs of the year, as the promise of guaranteed yields on U.S. government debt draws investors away from equities. Mortgage rates, meanwhile, stand at more than 20-year highs, weighing on real estate prices.
Powell also nodded to the"term premium" as a driver for yields. The term premium is the added compensation investors expect for owning longer term debt and is measured using financial models. Its rise was recently cited by one Fed president as a reason why the Fed may have less need to raise rates.Higher Treasury yields can curb investors' appetite for stocks and other risky assets by tightening financial conditions as they raise the cost of credit for companies and individuals.
The U.S. dollar has advanced an average of about 6.4% against its G10 peers since the rise in Treasury yields accelerated in mid-July. The, which measures the buck’s strength against six major currencies, stands near an 11-month high. A stronger dollar helps tighten financial conditions and can hurt the balance sheets of U.S. exporters and multinationals. Globally, it complicates the efforts of other central banks to tamp down inflation by pushing down their currencies.
The rise in yields, however, has taken the ICE BofA High Yield Index near a four-month high, adding to funding costs for prospective borrowers.
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