What Could the Rising Bond Yield Signal for Investors?
This week the 10-year Treasury finally crossed the 3% threshold. But, what could a rising 10-year yield signal for investors? And how could the tariffs on Japan and China affect the market? Read on to get the details…
Bond Yields Cross Key Threshold – much has been made in the bond world about the 10-year Treasury’s march to a 3% yield – a level it has not seen since July 2011. This week, almost a full seven years later, it finally crossed 3% convincingly, sitting at 3.09% as of May 16. A rising 10-year yield should signal a few things for investors. First is the market’s expectation for higher inflation looking forward. As the yield on Treasuries rises, generally speaking, it means that investors are demanding greater compensation for money lent to the U.S. government. If the expectation is for higher inflation going forward, it would make sense that the yield would rise. Second, a rising yield may signal a softening of global demand for U.S Treasuries. As demand wanes, bond prices lose support and yields rise. We saw signs of waning demand this week, as China sold $2.5B of Treasuries in March amid heightened trade tensions between Beijing and Washington. While that may seem significant, it is more symbolic than anything – China was a net buyer of U.S. Treasuries in January and February, and $2.5 billion of Treasuries only makes up a tiny percentage of China’s overall holdings ($1.19 trillion). Lastly, rising Treasury yields could nudge some investors to accept the risk-free rate of 3+% versus accepting risk associated with equities, so we could see some rotation as a result.
Supreme Court Rules on Sports Betting – the Supreme Court ruled this week that New Jersey could legalize sports betting in the state, which may pave the way for other states to follow suit. This could be a major breakthrough for the billion-plus dollar gaming industry, as the ruling strikes down the 1992 Professional and Amateur Sports Protection Act, a federal law stating that states could not “sponsor, operate, advertise, promote, license, or authorize” sports gambling. The floodgates may very well open from here.
Blockchain as an Investment Category? – the CEO of FedEx, Fred Smith, referred to blockchain as the “next frontier” for the logistics industry. Smith sees the potential for enormous benefits to supply chain data management, fraud prevention, and even the insurance side of the business. FedEx has already engaged in testing blockchain technology to track valuable cargo, and is working with the “Blockchain in Transport Alliance” to set industry standards. Fred Smith added that unless companies start to embrace the applications and benefits of blockchain, it could face “extinction.” Meanwhile, in New York, “Blockchain Week New York” kicks off this week with 8,000 industry players expected to attend conferences related to blockchain applications and cryptocurrency.
Japan Strikes Back – Japan and China were the two notable trading partners that did not receive exemptions from the steel and aluminum tariffs imposed by President Trump. Representatives from China are in Washington this week in an effort to negotiate versus resorting to trade war, while Japan is considering slapping retaliatory tariffs on U.S. exports worth $409M. It seems that Japanese leaders are prepared to notify the World Trade Organization of their plan, a necessary procedure under global trade rules. Japan’s decision, while understandable, may not be in their best interests – in Q1, Japan’s economy contracted by -0.6%, which marks an end to eight consecutive quarters of GDP expansion, the nation’s longest growth streak in 28 years.
While keeping your eye on negotiations in Washington and the rising 10-year yield, could be beneficial, in my opinion, you do not want to get too caught up trying to predict what will happen next or when we could see a bear market. In my experience, it can be more beneficial to focus on your financial situation. While you probably can’t predict what will happen next with the market, you can try to prepare for what’s to come.
You may be wondering how you can determine your long-term goals, your risk tolerance, your investment time horizon and other factors that make up your financial situation. This can be a difficult process to navigate on your own. So, to help you get a head start, I would recommend referring to our guide, “4 Steps to Managing Your Retirement Assets.1”
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