When Treasury yields reach multiyear highs, some investors get nervous. Higher bond yields are triggered by lower bond prices, and the effects are felt across the financial spectrum: from investing in stocks and bonds to borrowing costs and savings returns.
Two-year and 10-year Treasury yields are rising. Meanwhile, the 30-year Treasury yield ended above 5% for the 14th consecutive trading session on July 24, its longest such streak since July 2007, according to Yahoo Finance’s Chart of the Day. So far this year, it has closed above 5% 29 times, more than any other year since 2007.
Global bond yields across several major economies have climbed in tandem as higher oil prices, resilient economic data, and heavy government borrowing continue to add pressure.
Here is how rising Treasury yields could impact your finances.
What are Treasury yields?
The Treasury yield is the return an investor receives for lending money to the government — for example, 4.5% on a 10-year Treasury note.
If you invest $1,000 in a 10-year Treasury with a rate of 4.5%, you will receive $45 in interest annually over the next 10 years — and receive your initial $1,000 investment back when the bond matures in 10 years.
If bond yields rise, prices fall. If bond yields fall, prices rise.
Here is an example:
If rates go up, say to 5.5%, your Treasury note becomes less valuable because investors can earn a higher rate on newly issued Treasurys. If you sell your bond, rather than hold it to maturity, you will lose money.
If rates go down, for example, to 3.5%, your Treasury note becomes more valuable. If you sell the note before maturity, you’ll get more than the $1,000 you invested.
Of course, in either case, if you sell, you won’t get your $45 in annual interest any longer.
Changes in interest rates and prices only impact your investment if you sell before the bond matures.
What is causing higher Treasury yields
The bond market is reacting to the lingering conflict in the Middle East. With hope for a resolution fading, the war is keeping inflation fears active as gas prices continue to rise. The Consumer Price Index rose 3.8% in April — the largest gain in three years — while gas prices surged over 28%. Prices continued to soar in May and then cooled in June as energy prices fell. However, renewed tensions with Iran are bringing uncertainty back to the market.
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Inflation reduces consumer buying power, and Treasurys are reflecting that concern.
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A growing government deficit is also dulling bond market enthusiasm.
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The Wall Street futures market is also beginning to suspect that the Federal Reserve’s next move may be a rate hike, rather than an interest rate reduction.
How higher Treasury yields impact bond investors
As noted above, rising Treasury yields cut the market value of existing bonds. New investments may move to just-issued bonds rather than to holdings offered for sale in the secondary market.
How higher Treasury yields impact stock investors
Higher bond yields put pressure on equity returns. For one thing, companies have to pay more to borrow money.
Also, if an investor can get a risk-free return of 5% or more from the government, equities may seem less appealing. Stock market volatility can also dampen enthusiasm for riskier investments such as tech stocks.
How higher Treasury yields impact borrowing costs
The cost of borrowing money increases for the government and households as well. Rising Treasury yields:
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Expand the federal deficit as the cost of paying down debt increases. With the total national debt at $38.5 trillion, a 1% increase in interest rates would add $3.2 trillion in interest costs over the next 10 years.
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Are likely to cause mortgage rates, priced to 10-year Treasury notes, to continue rising.
How higher Treasury yields impact savings returns
One positive result of higher Treasury yields can be the upward momentum to savings returns. While short-term savings accounts are driven more by the prime rate and Fed rate moves, longer-term savings may be influenced by multiyear bonds.
Read more: 10 best high-yield savings accounts
How your 401(k) may be affected by Treasury yields
Mutual funds, target-date funds, and exchange-traded funds that invest in stocks may experience volatility. Bond funds, which are allocated to bundles of bonds, may also see some short-term losses.
How Treasury yields compare to Fed rates
The Federal Reserve works with short-term interest rates. Treasury yields span multiple time horizons. Fed rate moves ultimately steer the prime rate, which can impact consumer debt such as variable-rate credit cards (though little impact has been seen lately). Treasury yields mostly drive longer-term debt, such as mortgage rates.
Read more: What is the 10-year Treasury, and how does it affect your finances?
What to do now
Depending on your situation, here are actions to consider as Treasury yields rise:
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As a stock investor: Consider your current balance of investments, particularly growth stocks with already high valuations. Consider dividend-paying value stocks with strong cash flow and low debt. Expect volatility and resist making rash moves.
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As a bond investor: Review your bond holdings and consider overall duration. Short-term bond holdings will be more resilient. Long-maturity Treasury funds may see sharp losses. However, new bonds you buy will pay more interest. Consider a bond ladder with varying Treasury maturities. Consider TIPS, Treasury Inflation-Protected Securities.
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As a 401(k) or IRA investor: Having a proper mix of stocks, bonds, and cash in your retirement account can help you weather interest rate changes and market volatility. Remember, with a 401(k), you are contributing to your retirement savings with every paycheck. Ask your provider for an account review and suggestions for improvements that match the risk you are willing to take. For your IRA, ask your investment advisor if you are properly positioned.
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As a saver: Look for opportunities to enhance your return. If you see a favorable rate, you may want to move cash into higher-yielding accounts, such as CDs and short-term Treasurys.
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As a borrower: Consider paying down variable-rate accounts, such as credit cards and HELOCs. Mortgage rates may move higher, but bond yields are unpredictable. Be financially prepared to make a move when you find a mortgage rate that fits your budget.
Read more: Mortgage lenders with the best rates