You might have heard the buzz: “Treasury bond yields are rising,” “Tech stocks plummeting as a result of rising Bond Yields.” Phrases like these were everywhere late September and early October, and while they may seem confusing, the price of treasury bonds can be a helpful indicator of the economy’s health.
Treasury bonds are a debt instrument—assets that require fixed payments to the bondholders—issued by governments in order to support government spending. These payments are usually accompanied with interest, where the rate is determined by the bondholder.
Since the government issues treasury bonds, they have long been a dependable investment. Interest rates, however, have been at historic lows.
As businesses began to reopen following the height of Covid-related shutdowns in the U.S., the economy experienced massive inflation. As people flocked to restaurants and stores, supply and labor couldn’t keep up with demand. You may have experienced longer wait times for things as simple as fast food over the summer. You can thank coronavirus for that. This then sparked a great debate: Is this inflation simply transitory—meaning that supply would eventually catch up—or is it here to stay?
Investors began to speculate that the Federal Reserve—despite insisting that the inflation was transitory—would take action against this inflation by increasing interest rates. This means that the demand for existing bonds will go down since new bonds will have a higher return. As a result, investors sell their bonds at a discount to try and cut their losses. Much of this is based on speculation, however, because the Fed has not yet increased interest rates.
We see some spillover effects when it comes to tech stocks. Around the same time that treasury yields increased, the NASDAQ dropped 2.8%, according to an article published in the Los Angeles Times—the biggest drop since March. This is because when interest rates are low, investors don’t mind purchasing stocks instead of Treasury bonds because they aren’t an attractive option. But now, when Treasury bonds are paying well and they’re a safer investment, investors may choose to spend their money on these instruments instead.
The interaction between treasury bonds and the stock market that we saw in September and October represents the larger debate at hand. While the Fed insists that the current inflation is transitory, it is apparent that investors aren’t so sure. According to a Fox Business article, the cost of a shipping container from China to the West Coast hit $20,586, four times the price it was in January, illustrating the impact of higher demand on supply chains. And it’s not just shipping containers. Prices are shooting up from gasoline to burrito bowls. As we approach December, demand is going to increase even more with the arrival of the holiday season, causing widespread consumer concern for the future of the economy.