Volatile Treasury Yields Create Apprehension for Investors

On June 10, the government announced the sale of $19 billion in ten-year Treasury bonds at a yield of 3.99%. Rates have since backed off the high but the rising cost to borrow is causing some concerns.

So why the spike in yields? First, and maybe foremost, investors, including those overseas, are worried about the huge supply of debt needed to finance a federal deficit that is estimated at nearly $4 trillion over the next three years.

Signs that the US economy may slowly begin to recover later in the summer is also lifting yields. Moreover, the flight-to-quality last year that sent many traders scurrying into the safety of government bonds has dissipated.

Lastly, the Federal Reserve has driven short-term interest rates to nearly zero, flooding the financial system with money. It has also committed to buying $1.5 trillion in mortgage-backed securties and longer-term Treasury notes in order to drive mortgage rates lower.

The unprecedented amounts of monetary stimulus, coupled with an aggressive fiscal policy from the current administration, is raising worries that the Fed won't be able to withdraw the excess funds floating around the financial system quickly enough to prevent inflation.

There are fears that the spike in Treasury yields will brown the green shoots that have been sprouting in recent weeks. But rates remain near historically low levels, and unless we see another sharp upward move, concerns at this time seem to be unwarranted.

Charles Sherry
Tomorrow's Economy Today