Why bond yields are rising across the world

Nova Safo Jun 10, 2015
HTML EMBED:
COPY

Why bond yields are rising across the world

Nova Safo Jun 10, 2015
HTML EMBED:
COPY

Government bond yields have been rising for a couple of months now, but today they hit new highs for the year in the U.S., Japan, Germany and the United Kingdom.

Yields rise when prices fall, and prices fall when investors sell, which a lot of them are doing right now thanks to an improving economy.

“The bond market doesn’t like growth. It likes recession much better between the two,” says Marilyn Cohen of Envision Capital Management.

Cohen says investors cool to bonds in an improving economy, and that’s what is happening now. “Things are looking better in the economy, as far as housing starts, housing sales, durable goods are looking a little bit better, and certainly car sales are looking spectacular,” she says.

But there is a dark side to rising bond yields, because it could also be an indication that investors are worried about a lack of liquidity, says Karen Petrou of Federal Financial Analytics.

“We’re really looking at the unintended result of well-intentioned crisis reforms,” she says.

Those reforms require banks to hold onto more cash. As a result, they are not playing as big a part in buying and selling bonds, which Petrou says is leading to “significant structural changes in the bond market that have the financial system very, very spooked.”

But Cohen thinks we are far from crisis mode on that issue, and that while there may be some concern about liquidity, a lot more bonds would have to be sold off at once for there to be a crisis.

For the time being, she says, rising yields will nudge interest rates slightly higher, which should be good for Wall Street and Main Street.

“Most baby boomers that are living on fixed incomes will be very happy that interest rates go up,” because that means their monthly retirement incomes will go up, too, Cohen says.

Marketplace is on a mission.

We believe Main Street matters as much as Wall Street, economic news is made relevant and real through human stories, and a touch of humor helps enliven topics you might typically find…well, dull.

Through the signature style that only Marketplace can deliver, we’re on a mission to raise the economic intelligence of the country—but we don’t do it alone. We count on listeners and readers like you to keep this public service free and accessible to all. Will you become a partner in our mission today?

Your donation is critical to the future of public service journalism. Support our work today – for as little as $5 – and help us keep making people smarter.