Bond Markets Are Hit Hard — and It May Affect You — NPR

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Bond Markets Are Hit Hard — and It May Affect You — NPR

A trader works at the New York Stock Exchange on October 11. Bond yields are soaring, threatening to increase borrowing costs across the economy.

Angela Weiss/AFP via Getty Images


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Angela Weiss/AFP via Getty Images


A trader works at the New York Stock Exchange on October 11. Bond yields are soaring, threatening to increase borrowing costs across the economy.

Angela Weiss/AFP via Getty Images

There is a strong sell-off in the bond market, and this has big implications for both the economy and people’s wallets.

Yields on U.S. government bonds, particularly 10-year Treasury notes, determine the interest rates people pay on much of their debt, including mortgages and credit cards.

And the yield on a key bond hasn’t been this high since 2007.

Several factors are behind these massive sell-offs, including stronger-than-expected economic data and deteriorating public finances.

Here’s what you need to know about it.

How bad is the liquidation?

In 2022, the bond market suffered its worst year on record, as the Federal Reserve began aggressively raising interest rates to combat high inflation.

This year the situation has not improved much.

“It’s been a very difficult time for those investing in Treasuries,” says Katie Nixon, chief investment officer for wealth management at Northern Trust. “It’s been bad.”

After fluctuating at the start of the year, bond prices have been particularly affected in recent weeks, leading to a sharp rise in their yields.

Bond prices and yields have an inverse relationship, meaning prices fall when yields rise, and vice versa.

The yield on the 10-year Treasury note – widely considered one of the world’s least risky investments – briefly topped 5% on Monday. It had not been this high since June 2007, when George W. Bush was in the White House and Ben Bernanke was head of the Federal Reserve.

This is a shocking trend given that, for years, the U.S. economy has benefited from extremely low interest rates.

What drove the latest bond sell-off?

One of the main reasons is that economic data has been stronger than expected.

Although a stronger economy is generally good news, the Fed currently needs a calmer economy to bring down inflation.

This means the Fed may have to keep rates high for some time to come, as inflation still remains above its 2% target.

Wall Street is also concerned about the growing level of debt of the US government, a main reason why Fitch Ratings decided to downgrade the country’s bond rating by one notch, from AAA, the previous best rating, to AA+ .

The U.S. budget deficit jumped in the last fiscal year, in part because of increased spending and slowing tax revenues.

Federal Reserve Chairman Jerome Powell speaks during a meeting in Washington, DC, September 28. The Fed has raised interest rates the most aggressively since the early 1980s.

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Federal Reserve Chairman Jerome Powell speaks during a meeting in Washington, DC, September 28. The Fed has raised interest rates the most aggressively since the early 1980s.

Alex Wong/Getty Images

There are also more technical reasons.

Most importantly, there is less demand for bonds from an institution that has been one of their biggest buyers for years: the Fed.

During the COVID-19 pandemic, the central bank purchased billions of dollars of fixed income securities. But since 2021, it has been reducing the size of this portfolio in order to help reduce inflation by removing some money from the financial system.

“The absence of the Fed as buyer of first, last or any other resort” makes conditions even more difficult,” according to Nixon.

Why are bond markets important?

Bond yields are critical to the economy because they influence the interest rates people pay on credit cards, auto loans and home mortgages.

Higher yields also trickle down to businesses, increasing the cost of debt for businesses.

Higher borrowing costs could have adverse consequences for the economy, as individuals, as well as businesses, cut back on spending in the face of high interest rates.

Take for example the housing sector. It is a vital part of the economy and mortgage rates are among the most interest rate sensitive.

Right now, the average rate for a 30-year fixed-rate mortgage is 7.63%, according to Freddie Mac. That’s the highest level since 2000 – and it’s fueling a decline in existing home sales, as people who bought property when mortgage rates were lower are reluctant to give up their lower rates.

Interest rates on credit cards are also increasing, as are interest rates on auto loans. According to the Federal Reserve Bank of New York’s latest “Quarterly Household Debt and Credit Report,” credit card balances stand at $1.03 trillion, a record high.

Additionally, many banks are investing heavily in government bonds, which could make them vulnerable to rising yields.

This year, Silicon Valley Bank and two other regional lenders collapsed in part because of concerns about the health of their bond investments. This triggered bank runs.

But it’s not just about banks. People with retirement portfolios also have a large portion of their nest egg tied up in bonds, making what happens is critical.

What is the outlook for bond markets?

Much will depend on inflation and the Fed’s approach to interest rates.

Wall Street is betting that the central bank may stop raising interest rates this year, given that inflation has continued to fall and policymakers have already raised them very aggressively.

Today, investors and economists are trying to determine how long the Fed will keep interest rates high.

Not long ago, bond investors expected that the Fed could begin cutting interest rates as early as this year to avoid tipping the economy into a recession.

But now that the economy has proven stronger than expected, many are getting used to the idea that rates might be “higher for longer.”

John Canavan, senior analyst at Oxford Economics, says investors are now “much more pessimistic about rates, as we adjust to Fed policy, a stronger economy and the risk that the inflation will be more difficult to bring down than expected.

That said, things could change. Bonds tend to do well in periods of high uncertainty, and right now there is a lot of concern around the world as Russia’s invasion of Ukraine continues and Israel is in war against Hamas.

If the geopolitical situation worsens, bonds could see renewed interest.

But for now, most investors don’t expect the bond market to improve substantially in the near future.

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