Longer-dated U.S. government bond yields jumped after the Federal Reserve signaled that it would likely start pulling back on its monetary stimulus in November.
Since the Fed’s announcement on Wednesday afternoon, the yield on the U.S. 10-year (^TNX) climbed 10 basis points to as high as 1.41%, a figure not seen since July.
The yield on the U.S. 30-year (^TYX) similarly rose as much as 10 basis points, to 1.92%.
Polaris Wealth Advisory Group Managing Partner Jeff Powell said that he expects yields to rise further once the Fed begins slowing its bond buying.
“We are currently very underweighted to the fixed-income marketplace for this exact reason, we think there will be continued pressure on yields to rise,” Powell told Yahoo Finance on Thursday.
Higher bond yields mean lower bond prices, suggesting that investors may be turning away from government bonds in favor of riskier assets like stocks. As yields surged, the S&P 500 and the Dow Jones Industrial Averages saw gains as well, with both indexes rising over 2% since the Fed decision.
On Wednesday, Fed Chairman Jerome Powell signaled a strong likelihood that the policy-setting Federal Open Market Committee starts tapering the pace of its asset purchase program in early November.
“If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” Powell said.
Since the depths of the pandemic, the central bank has been absorbing about $120 billion a month — directly in U.S. Treasuries, in addition to agency mortgage-backed securities. Slowing its purchases to a stop, which Powell said could be carried out by the “middle of next year,” would mark the first steps in winding back its extraordinary pandemic-response stimulus.
In the meantime, the Fed is still holding interest rates at near-zero.
A positive stock market reaction shows investors shrugging off the Fed’s more “hawkish” signaling Wednesday.
Projections on where rates could be headed show the 18-member FOMC split evenly (9-to-9) on a 2022 liftoff from zero rates.
The Fed’s target rate has a more direct effect on shorter-dated bonds. But the Fed’s signaling on interest rates years into the future may be behind the market run-up in longer-dated Treasuries like the 10-year and the 30-year.
FOMC forecasts extending to 2024 now show the possibility of six to seven total rate hikes (of 25 basis points each) over that time horizon.
A Fed that’s more aggressive on raising rates may explain a push up in longer-dated Treasuries, but the depth of the market for government bonds means other explanations could be at play too.
For example, bond yields could price in expectations over the Fed’s success in taming inflation (higher inflation expectations can tilt nominal bond yields higher). Yields could also reflect foreign buying (a demand for U.S. dollar-denominated assets could push yields down).
For now, market strategists say longer-dated bond yields still remain historically low.
“Only a rise in real yields of more than 50 [basis points] over three months would likely weigh on equity returns, particularly in emerging markets,” UBS Global Wealth Management’s Chief Investment Officer Mark Haefele wrote Thursday.
Haefele added that even if that were the case, those losses have historically reversed in the following three months, based on data since 1997.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.