U.S. Treasury yields rose on Tuesday as investors look ahead to 2023.
Yields on the 10-year Treasury note were up around 11 basis points to 3.854%, while the two-year Treasury yield increased eight basis points to 4.402%.
Bond yields and prices have an inverse relationship, so the faster yields go up, the faster bond prices tend to crash, according to Forbes.
After hitting an all-time low of 0.55% in July 2020, the 10 year-treasury yields are continuing to rise. As a result, institutional investors may be opting to divert funds out of equities and into safer alternatives.
The 10-year yield steadily climbed in December.
“Maybe the U.S. markets had gotten ahead of themselves in anticipating a pivot from the Fed, so more cold water thrown on that kind of narrative, that may be why yields are moving up again,” said Aoifinn Devitt, chief investment officer at Moneta.
The Bank of Japan (BOJ) recently decided to change its yield curve control policy, which has since affected U.S. Treasury yields, according to Bloomberg.
The BOJ is now allowing yield on the 10-year Japanese government bond to move 50 basis points on either side of its 0% target, up from 25 basis points previously.
The decision shocked global markets, CNBC reported.
Mihir Kapadia, CEO of Sun Global Investments, explained the importance of this policy shift by noting that BOJ “was the last major central bank which had kept to a policy of low, near zero, interest rates.”
Now those in the industry are forecasting higher interest rates in 2023, which according to Kapadia will bring “higher bond yields in Japan, a stronger Yen (a lower dollar), and possible repatriation of billions of dollars of assets held by Japanese investors abroad.”
“The era of cheap money, which has fueled asset prices for decades, is well and truly over,” he added.
Bloomberg reported that the yen jumped from 137.16 to as much as 133.21 against the dollar after the BOJ announcement.
On the other hand, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, pointed to the BOJ’s insistence that the decision was just “fine tuning, not the start of a reversal of policy” Streeter believes the move should be viewed more as “a sign of testing the water … to try and prod demand and wake up prices.”
“Those who think that there is nothing stunning about the announcement should note that Japan is one of the world’s largest creditors, and the hawkish tilt will surely impact how investors think of their 2023 strategies,” affirmed Kapadia.
The Federal Reserve instituted several interest rate hikes in 2022 to combat inflation, and concerns around these rate hikes propelling the U.S. economy into a recession have been increasing among investors heading into the new year.
Get rid of the FED. They are the prime reason the inflation is turning into a death-spiral!
The Fed, as an independent entity, assures that US monetary policy does not get highjacked by politicians for political gain.
The current inflation cycle resulted largely from supply side shocks related to COVID and related aftershocks.
The Fed’s interest rate strategy is a response to inflation rather than a cause thereof. While higher rates may be uncomfortable, to characterize the economy as in a “death spiral” overdramatises the current situation.
Higher interest rates may well result in savings accounts again becoming a viable alternative to equity risk. JMK
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