NEW YORK (Reuters) – Yields on U.S. Treasury bills have risen to their highest level in more than a year, since record lows reached in 2020, as the Federal Reserve’s commitments to keep rates close to zero in The next few years encouraged investors to bet on economic growth and inflation to heat up.
Although yields remain low by historical standards, a rapid increase can affect assets ranging from stocks and commodities to real estate prices.
Here’s what’s going on:
Why are yields increasing?
In recent months, advances in the development of COVID-19 vaccines and fiscal stimulus have raised expectations that the economy will recover. The improved risk appetite encouraged investors to buy riskier assets, such as stocks, rather than bonds. Inflation expectations have also risen, causing bond prices to fall and yields to rise. Weaker demand for debt was evident in the disappointing seven-year US Treasury bill auction last month, which helped boost yields.
Where do investors think earnings will go next?
Investors generally believe that yields will rise further in 2021, although some think the Fed could act to limit an increase in yields that it considers extreme enough to threaten the economic recovery. Some analysts think this could happen if 10-year Treasury yields rise well above 2% without substantial economic improvement.
What does the increase in earnings mean for other assets?
Higher Treasury yields have made the US dollar more attractive to investors seeking income, boosting it from the three-year lows reached in January.
On the other hand, the spot price of non-productive gold fell this year, after outpacing almost all other assets last year.
For equities, rising yields are a mix, slowing the recovery of technology and other growth stocks, as investors worry about the erosion of these companies’ long-term cash flows. But higher yields also raised financial stocks and accelerated turnover for other defeated sectors.
How can higher Treasury yields affect individuals?
The effects on individual portfolios can be seen more directly in the housing market. Interest rates charged on fixed-rate mortgages tend to obscure movements in Treasury yields and have already started to rise.
Savers may begin to see rates of increase in high-yield savings accounts again.
Reporting by Kate Duguid and Karen Brettell; edition of Megan Davies and David Gregorio