The $24 Trillion Market That Predicts and Influences Interest Rates
The market for U.S. government bonds, called the Treasury market, offers predictions on the path for interest rates and the economy.
By Isabella Simonetti
How much higher will interest rates go?
It’s a question nagging investors across the financial markets.
Inflation is out of control, and traders fear that the Federal Reserve could tank the economy as it tries to wrestle prices lower by raising interest rates.
In the stock market, the S&P 500 is down about 22 percent this year, reflecting worries that a slow economy will hurt corporate profits.
But even as the index jumped 8 percent in October, many analysts warned not to make too much of the rally.
The nearly $24 trillion market for U.S. government bonds, called the Treasury market, offers clearer signals about the prospects for both interest rates and the economy.
Those come from yields — think of them as interest rates — on Treasury bonds, which have gone up fast this year.
They started to rise well before the Fed began to raise its policy rate, in anticipation that it would do so.
The Treasury market doesn’t just interpret economic winds; it also influences them.
When yields on government bonds rise, they affect everything from the housing market to student loans, and changes in the Treasury market often lead the stock market higher or lower.
Here’s a guide to understanding what is happening with Treasury yields right now, and why it matters.
A bond is similar to any other kind of loan.
First the basics.
A bond is a form of debt, which means that when it is issued, someone is borrowing money and someone else is lending it.
In the U.S. government bond market, the borrower is the federal government.
Lots of governments do this: When the United States borrows, the bonds are called Treasuries.
In Britain, they’re called gilts, and in Japan, they’re known as J.G.B.s which stands for Japanese government bonds.
The lender is the bond investor, who expects to be paid interest on the investment.
That’s a key difference between a bond and other assets that people buy or trade, like stocks: That interest is known as the bond’s coupon.
The bond’s yield is the total annual return someone can expect to earn from it.
(A bond’s yield rises as its price falls, and vice versa.)
Just like the rate a homeowner pays on a mortgage, a bond yield reflects a lot of factors: when the debt will be repaid, the risk that it won’t be, the investor’s view on whether earnings on the loan will be more worthwhile than other investments — like stocks and cryptocurrencies.
When an investor owns a Treasury bond until it matures, the return an investor will receive is fixed, but because government bonds are publicly traded, their value can rise or fall just like a stock price and that means yields move higher or lower, too. Those changing yields reflect shifting views in the market on inflation and expectations for what the Fed will do with the interest rates it controls, said Dana D’Auria, co-chief investment officer at Envestnet.
“They’re kind of like stock prices in the sense that they have to reflect a ton of information, but they’re only one number,” Ms. D’Auria said.
Treasury yields have been climbing fast.
Even within the world of Treasuries, there is a lot of variety.
The U.S. issues debt with a range of “maturities” — a term that refers to when it has to be paid back — from four-week Treasury bills to the 30-year Treasury note.
Often, it’s the 10-year Treasury note that gets a lot of attention.
It has been climbing steadily since August and has more than doubled since the beginning of the year.
That includes a 12-week streak of gains that lifted the yield to a 14-year high of 4.22 percent on Oct. 21.
It has since come off that high and stood close to 4.15 percent on Thursday.
Underpinning it all is the Fed’s campaign to bring down inflation by raising interest rates to make it more expensive for consumers and companies to borrow money, with an aim of slowing consumption and easing pressure on prices.
The central bank sets the target range for the Fed funds rate — which commercial banks charge to lend money to one another overnight — and interest rates across the economy adjust, broadly moving in line with the Fed’s wishes.
“When they raise interest rates, what that does is that raises borrowing costs for the government on the front end and it kind of bleeds into the other parts of the Treasury securities,” said Jeffrey Sherman, the deputy chief investment officer of DoubleLine, a money management firm.
Benchmark interest rates over time
But Treasury yields began to climb well before the Fed started raising interest rates, signaling the bond market’s expectations that the Fed was about to act.
Yields on the 10-year note, for example, had already climbed from 1.51 percent at the end of 2021 to 2.14 percent on March 15, the day before the Fed raised its benchmark interest rate for the first time this year, by a quarter of a percentage point.
Another Treasury note, the two-year, which is seen as more reflective of Fed moves, rose from 0.73 percent at the end of December to 1.86 percent on March 15.
It stood at 4.72 percent on Thursday, compared with the Fed’s target for its policy rate, which is now in the range of 3.75 percent to 4 percent after the central bank raised it again this week.
“It’s a prediction,” said Kristina Hooper, the chief global market strategist at Invesco.
“All it can do is try to reflect expectations around the Fed as opposed to where the Fed funds rate is now, and so we have to recognize that this has been an extraordinary year in which the Fed didn’t realize where it was going.”
Rising yields affect borrowing costs throughout the economy.
One reason the 10-year yield gets so much attention is that it is the starting point from which lenders determine mortgage rates, which means that as it rises, taking out a loan to buy a new home becomes more expensive.
As of Thursday, the average interest rate on a 30-year mortgage was 6.95 percent, up from 3.22 percent at the start of the year, according to data from Freddie Mac.
“When Treasury yields go up, as we’ve seen very notably right now, it means that banks have to demand a higher interest rate from everyone that they’re lending to, which means rates on mortgages go up, which means rates on auto loans go up,” said Meghan Swiber, senior U.S. rates strategist at Bank of America.
The higher mortgage rates have already hit home buyers.
In September, home sales dropped almost 24 percent from the previous year, according to data from the National Association of Realtors.
Government-backed student loans are also tied to Treasuries.
They have a fixed rate that is set each July, so student borrowers won’t be affected by the rising yields until next year.
They also offer a view of what could happen next in the economy.
The Treasury market also offers predictions for what will happen in the economy.
Because Treasury bonds are issued in varying maturities, each one signals expectations for a different period of time.
Typically, the longer the horizon for an investment, the more bond investors expect to be paid in interest.
(We have more certainty about how things will go over the next three months than we do about the next decade.)
So the yield on a 10-year Treasury note is usually higher than the yield on one that matures in just a few months or a couple of years.
That’s not the case these days.
Both the three-month and the two-year Treasury bills have yields higher than the 10-year note, creating a so-called inverted yield curve.
When that happens, it shows investors are more worried about the economy in the short term than the long term, and it’s a reliable predictor of recessions.
Sometimes a recession doesn’t follow this kind of move, and the rise in short-term yields doesn’t tell us exactly when a recession will start.
But it gets Wall Street’s attention because this pattern has preceded every U.S. recession for the last half-century.
Isabella Simonetti is the 2022 David Carr Fellow at The New York Times.
0 comments:
Publicar un comentario