Surging bond yields reflect the prospect of surging bond supply, and perhaps a notching up of the market’s estimation of US default risk. From Guy Manno at crushthemarket.com:
The US election results are in and the US stock market is enjoying a sharp rally over the shock news of Donald Trump winning the election and becoming the new President elect.
On the back of the big rally in US stocks there has also been another big shift occurring in another very important asset class, US Government bonds.
US Government Bond Yields Surging
Since the news of the results of the US election were released US Government bonds have experienced a huge sell off in prices causing the yields to surge on Government bonds ranging from the 2 year bond all the way to the long end with 30 year Government bonds. (Note: Bond yields move inversely to bond prices.)
Specifically the US 10 yr Govt bond has seen the yield jump from around 1.80% before the election results to the current price of around 2.13%. (See chart below)
In the chart below you can see the magnitude of the rise in US 10 yr bond yield reaching the same level of the S&P 500 dividend yield.
Traditionally bond yields help to price the relative value of stocks. If bond yields rise the dividend yield on stocks would also have to rise. Usually stock dividend yields are above bond yields to entice investors to own riskier stocks over more conservative bonds. For the yield to rise on stocks either dividends would need to rise and or stocks would have to fall in price to lift the dividend yields.
So the fact that the 10 year bond yield has reached the same level of the S&P 500 dividend yield means that a bond investor can receive the same yield as stocks without the perceived risk.
Normally when Government bond yields rises considerably it indicates that either inflation is also rising and / or the economy is accelerating it’s growth prospects. When the economy start to accelerate its growth prospects investors traditionally buy stocks in anticipation of higher profits and dividends from a stronger economy and sell bonds which are considered defensive assets.
Many analysts and financial commenters have already come out and suggested that growth is now back on the agenda for the US economy since the electing of Trump as the new president. Because of the Trump factor these commentators have suggested this is the reason why bond yields are rising and suggest it’s a positive.
Why Surging Bond Yields Signals Pain Ahead
However we are not in normal times and there is a very big reason why the FED has spend the majority its balance sheet trying to keep US Government bond yields low, by buying them through the various QE programs and artificially forcing the bond prices higher lowering the yield.
It’s also the same reason why the FED has only increased the interest rates once back in December 2015 and has been terrified to rise them further since then. The reason is because the US has a major debt problem from a Government , corporate America and consumer level.
So if the FED has tried all this time to keep rates lows, how is it all of a sudden a good thing for the Government, corporate America, the consumer and the economy that interest rates are now rising. Especially when the debt levels in the US are higher now than before the 2008 GFC event that shook the US and Global economy.
To continue reading: Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy