If you are following the bond market, you may have noticed that long-term US Treasury yields have been rising lately, reaching their highest levels since late 2022. What is driving this trend and what does it mean for investors?
One of the main reasons for the rise in long-term yields is the increase in short-term interest rates by the Federal Reserve, which is trying to combat inflation and support economic growth. The Fed has raised its target rate four times in 2023, bringing it to 5.5% in July 2023 (see table with fed hikes below). This has pushed up the yields on short-term Treasury bills and notes, which reflect the market's expectations of future Fed actions. Long-term treasuries are catching up now.
Another factor is the large supply of Treasury bonds that the government is issuing to finance its spending and deficits. The Treasury Department announced that it will boost its auction sizes for longer-term debt in the third quarter of 2023, adding more pressure on bond prices and yields. The US fiscal situation has also deteriorated, leading to a credit rating downgrade by Fitch Ratings in August.
A third reason is the strength of the US labor market, which has been adding jobs at a robust pace despite the challenges posed by the pandemic and supply chain disruptions. The latest ADP report showed that private payrolls increased by 324,000 in July, beating expectations. This suggests that the economy is still resilient and that wage growth and consumer spending will remain solid.
The rise in US long-term Treasury yields has implications for various sectors of the economy and financial markets. Higher yields mean higher borrowing costs for businesses and consumers, which could dampen investment and consumption. Higher yields also make bonds more attractive relative to stocks, especially for income-oriented investors. However, higher yields also reflect optimism about the economic outlook and the Fed's ability to manage inflation and growth.
As an investor, you should be aware of the factors that affect long-term US Treasury yields and how they impact your portfolio. You should also diversify your holdings across different asset classes, maturities, and regions to reduce your exposure to interest rate risk and benefit from opportunities in different markets.
Short-term investors who believe that the current momentum for US long-term treasuries will continue, could take advantage of that by holding ProShares UltraShort 20+ Year Treasury. The ProShares UltraShort 20+ Year Treasury etf seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index and has generated 100% since beginning of 2022.
For more details about bond investing and benefits of portfolio diversification, please check out our articles "Bond Investing: Should You Own Single Bonds or Rather a Bond ETF?" and "Why Portfolio Diversification Matters Even More Nowadays" on our finance blog on our website Smart Money Diary.
Disclaimer: The scenarios or investment products presented above should not be construed as investment advice. All investments involve some level of risk, and past performance is never a guarantee of future returns. As always, do your own research in order to validate and better understand the underlying risks.
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