Watching the yield rise like (Scott Olson/Getty Images)
The name’s Bond… T-Bond. Uncle Sam’s payouts on IOUs are getting fatter: last week the 10-year Treasury yield (basically: the interest rate the US government pays to borrow money) briefly topped 4% for the first time since November. While Treasury yields may sound as enthralling as waiting in line at the DMV, they’re key to understanding stock-market moves.
Define the relationship… As interest rate (or inflation) expectations rise, yields rise and bonds fall. Historically, rising Treasury yields tend to lead to falling stocks, because they make Treasury securities more attractive when compared to riskier assets (like… stocks). The US gov’t has historically always paid its debt on time, so Treasury securities are considered “safe” investments. Now that the 10-year yield is hovering around 4%, it could be a tipping point for some investors to offload some stocks and buy more bonds.
It’s all about opportunity cost… AKA: what you stand to potentially lose by choosing one option over another. When Treasury yields are low or near zero, there’s little incentive to invest in bonds over stocks. But as potential returns from low-risk investments (like US gov’t bonds) rise, investors demand higher returns from stocks to justify the changed opportunity cost. As yields climbed last month, the S&P 500 lost 2.6%.