The yield on the 10-year U.S. Treasury notes hit its all-time high in more than four years at 3%. Yields have been a hot topic for many investors around the world as its movement significantly triggers the global finance markets and currencies around the world. Yields have been driven higher as strengthening inflation prospects added to expectations for a faster rate of monetary tightening from the Federal Reserve.
One head of Equities in London claims, “The three percent level is a big psychological point for investors and has gained huge focus. It is not the move towards three percent yield that is unusual, but the historically low level of yields we’ve seen in recent years further reflecting the long-lasting scars of the financial crisis.”
The increase in rates not only reflects a higher cost to borrow money, but also makes debt a little pricier for companies. This will play a major impact within the operational side of the business as room to increase salaries might shrink and significantly decrease shareholder returns due to a slowdown in investment ideas.
Investors should be wary that a higher treasury yield will not only affect everyday consumers, but it will also make equities less attractive while signaling that the economy could potentially be at risk. With people not being able to spend as much on other investments due to an increase on mortgage rates and borrowing costs, spending will decrease and possibly kick off an economic crisis in the future.
However, with higher rates and the government set to report first-quarter GDP this Friday, some see higher rates as a vote of confidence on the strength of the economy. Traders and investors have blamed the central bank’s actions to unwind its massive balance sheet and gradually hike rates because these actions have resulted in a sharp rise in short-term rates and a flattening in the yield curve. Perhaps, it might make sense to look into investing within the bond market as it might seem like a favorable market with the current economic situation.