According to a recent article from The Associated Press, the “benchmark for most other investments” are US Treasury bonds. It is these which are thus regarded “among the closest approximations to a “safe” investment in the financial system.”
The problem thus is when prices for these start to drop, resulting in a jump in the bonds’ yields. There was a recent S&P 500 drop by 3.3 percent marking its largest loss since February, hitting technology markets the most. This, according to the article is “the latest sign that markets may be struggling to adjust to a new era, where returns are no longer juiced by the ultra-low rates that prevailed in the years following the Great Recession.” It is also indicative that the decreasing interest rates which started in the early 1980s is now finished.
What this means is four-fold:
- This is bad for stocks as it’s more expensive to borrow and reduce profits for companies
- Not good for investors as bonds are meant to be the safe part of what they are investing for their clients
- “biggest threat to stocks would be a burst of inflation that causes the Federal Reserve to sharply accelerate” the Fed’s rate increase.
And, according to Martin Baccardax in an article in The Street, “The U.S. Treasury sold benchmark 10-year notes at the highest auction yield since 2011 Wednesday, Treasury data indicated, but demand for the $23 billion auction fell to lowest since February, suggesting the recent rise in global fixed income markets is failing to attract investors.”