For the first time since last April, Wall Street bond investors are seeing the economic glass as half-full.
Interest rates on Treasury bonds have been rising slowly and subtly over the past week – and that may indicate that Wall Street believes the economy is finally going in the right direction.
There are reasons for their optimism. Economic numbers, particularly around housing and to a lesser extent around unemployment, have been improving steadily. Congress decided, uncharacteristically, not to have a knock-down, drag-out fight over the debt ceiling until at least 19 May.
The result: yields for 10-year Treasury bonds jumped to over 2% Monday for the first time since April 2012.
The jump signals that, at least temporarily, Wall Street may believe that the recovery has accelerated, so they don’t need to pile into Treasury bonds.
Michael Pond, interest-rate strategist at Barclays Capital, said that selling Treasury bonds is not Wall Street’s way of disapproving of the better economic news. “Everyone, everyone wants the recovery to accelerate,” said Pond.
Treasury yields are not exactly the most exciting subject in the world, for good reason: yields have been so low for so long that they have rarely budged to reflect any difference in economic conditions.
But Treasury yields are also a way of reading the US economy. Mortgage rates, for instance, are often related to the 10-year Treasury bond. Mortgage rates have been at record lows because the 10-year Treasury has also been at record lows.
Because Treasury rates are rising, “I would expect mortgage rates to rise,” said Guy LeBas, a portfolio manager with Janney Montgomery Scott.
Treasury yields have been very low for two reasons. The first is demand: the Federal Reserve controls the Treasury market and has a huge influence over prices, which it wants to keep low.
The Fed is the largest owner and the largest buyer of Treasury bonds. It holds $1.7tn in US government debt, nearly double the amount it did three years ago.
Part of the Fed’s rationale in keeping Treasury yields low is to encourage investors who would buy bonds to avoid Treasuries and move to corporate bonds instead, where companies could use the cash.
The Fed also wants to keep rates low to encourage consumers to spend money.
The mechanics of Treasury bonds are a little complex. Treasury bonds are considered the safest kind of investment because they are backed by the federal government, which guarantees they will be paid. So when investors are worried about risk, they run to the safest investment possible: treasuries.
When investors sell their treasuries, it means they perceive there is less risk in the US economy and that things are getting better.
A lot of things could happen to change that perception, of course – anything from Washington dysfunction to bad economic news – but for the time being, let’s enjoy the rare pause in nonstop disaster and crisis.
[Wall Street via Shutterstock]