For 25 years, the yield on U.S. Treasuries has marched steadily downward. But no longer. Kit Juckes of the Ecu group says that the yield on the 30-year Treasury bond has moved above its 100-month average. “This suggests the long post-Volcker period of declining yields has finally ended,” writes the Economist’s Buttonwood column. Buttonwood continues: “Investors are starting to demand a premium for the risk that fiscal and monetary policy will eventually generate higher prices.”
Other commentators are chiming in and making similar sounds of distress. The Abnormal Returns blog notes that “if that trend [of declining rates] has changed it affects nearly every aspect of portfolio management. For instance, equity valuations would have to reflect higher discount rates and borrowing costs. Equity-centric investors would soon be faced with competitive yields on fixed income securities. The list goes on.”
While all of this sounds worrisome, especially for stock market investors, let’s remember that 30-year yields are still under 5%. And rising rates aren’t all bad news. They’ve been kept at record low levels over the past couple of years by fears that the world might slip into depression. The trend to higher rates is a vote of confidence that the global economy is now healthy enough for investors to start demanding a more ample reward for tying up their cash. Smart investors should be far happier to see gradually rising rates than never rising rates.
Freelance business journalist Ian McGugan blogs for the Financial Post