Yields on treasury bills are rising. Here’s what that tells us.


The 10-year Treasury yield rose sharply last week. Investors demand more in return for holding these bonds, a reflection of what they see happening in the economy.

These investors lend money to the government for 10 years and get paid for it – the payment is called the return. When yield rises sharply, “it’s basically the market that says it wants to get paid more for the risk of lending more,” said Jonathan Mondillo, head of municipal bonds in Aberdeen.

What would make a group of bond buyers want to be paid more? They may find they have better options elsewhere. “It’s indicative of the strength of the economy,” Mondillo said.

If you expect the economy to provide better and future investment opportunities sooner than you previously thought, you might think twice before leaving your money in bonds with low and low yields. And, Mondillo added, bond investors envision a strong economy in 2022.

“When you talk about corporate earnings, they’re still very strong. When you look at GDP growth, it’s still strong, ”he said.

There’s something else that pushes bond investors to demand a higher yield: inflation, according to Gregg Lemos-Stein of S&P Global, a current Marketplace underwriter.

“Rising inflation erodes the yield that the holder of the bond, or loan, holds over time,” explained Lemos-Stein. “So if you get 5%, it’s fine if inflation is zero, but if inflation is 5%, then your actual return is essentially zero. “

Expectations of future inflation have increased. The Fed itself has increased its inflation estimates for this year.

“There have been, you know, talk about oil, higher natural gas prices in Europe, more talk about inflation,” said Eric Stein, director of fixed income investments at Eaton. Vance.

The question remains open as to what will happen with inflation in the years to come, but, Stein noted, the bond market’s verdict is that it will be higher than what bond investors thought only ago. one week.

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