Investors often claim the U.S. government bond market is the best place to look for insights into the shifting outlook for the economy and interest rates. Right now, some think it isn’t.
In the waning days of the third quarter, yields on U.S. government bonds shot higher. That might be taken as an encouraging sign about the prospects for the economy because yields, which rise when bond prices fall, generally tend to climb with forecasts for growth and inflation.
Many analysts, though, don’t believe that yields are rising now because much has changed about the economic trajectory. Rather, they see the bond selloff as an overdue correction to an overdone rally—the product of profit-taking more than a major shift in thinking.
The reason that yields rise matters because it can influence how investors respond in other markets. All else being equal, higher yields can hurt stock prices by lifting corporate borrowing costs and reducing the value of future earnings. But investors can also welcome them if they feel rising yields reflect an improving growth outlook.
In this case, investors have registered a mixed reaction. Most are optimistic about the economy, but their views haven’t changed much since last week, when yields were lower. Stocks have been volatile, first climbing when yields started rising, then falling sharply to start this week.
Many investors have been waiting for bonds to take a hit. After reaching a pandemic high of 1.749% on March 31, the 10-year yield dropped as low as 1.173% on Aug. 2 and remained safely below 1.4% until the end of last week. But even in August, many continued to believe that yields were unnaturally low and bound to snap higher.
“I don’t think there’s really anything particularly fundamental going on,” Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets, said on Aug. 2 when yields were tumbling. Some investors, he said, were buying bonds while they still could, aware that prices would likely decline at some point but confident that they wouldn’t in the very near future. Others with longstanding short positions were inclined to sell but skittish after being burned by the rally.
Mr. Gwinn had guessed that momentum would only really shift after the Federal Reserve’s Sept. 21-22 meeting. Before resetting their positions, he said, investors were almost waiting for that meeting when the Fed would likely take a “tangible turn” to tighter monetary policy.
Seven weeks later, that is more or less what happened. The Fed on Sept. 22 signaled that it would likely start scaling back its purchases of Treasurys and mortgage-backed securities as soon as November. Officials also indicated that they could raise short-term interest rates sooner and faster than they had previously expected.
Neither development was shocking to investors, and yields were little changed right…
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