Here’s what a 3% yield on the 10-year Treasury means for your money
According to the Yield on the 10-year U.S. Treasury pushes ever closer to 3% — a symbolic level not seen since late 2018 — financial analysts have described how it could affect people’s finances in a number of ways.
Last week’s 10-year rate reached 2.94%. It was its highest point for more than three decades. This is a significant increase from the 1.6% that the 10-year rate started last year. Because it sets the standard for mortgage rates and loan interest rates, this is important.
Inflation has risen, which was exacerbated in part by Russia’s-Ukraine conflict. This is causing concerns about how it could impact consumer demand as well as economic growth. The Federal Reserve’s aggressively increasing its own money rate, as well as tightening its monetary policy to limit rising prices could be a factor in the economic downturn.
Investors are selling bonds out to get higher yields due to their inverse relationship. How would this affect your money if the rate reaches 3%?
Rising yields can lead to higher debt costs, like consumer loans or mortgages.
For instance, Schroders Investment Strategist Whitney Sweeney told CNBC via email that the effect of a higher 10-year yield on college loans will be felt by those students taking federal loans for the upcoming school year.
“The rate is set by Congress who approves a margin applied to the May 10-year treasury auction,” she said, but highlighted that the rate is currently zero for existing federal student loans due to pandemic relief measures.
Sweeney stated, in addition that private variable-rate student loan rates would rise as the 10-year Treasury yield increases.
Sweeney stated that mortgage rates are more in line than the yield on the 10-year Treasury. Sweeney stated that the mortgage rate has seen an increase in recent years.
Antoine Bouvet from ING Senior Rates Strategist said via email to CNBC that higher interest rates in government debt could also translate into higher returns for savings made in fixed-income securities.
“This means that pension funds will have less trouble investing for future pensions,” he said.
Bouvet stated that stock market investment would be more difficult for companies with higher debt levels. This has been a problem that’s associated with tech companies, which is why the sector has had more volatility lately.
Sweeney also pointed out, similarly, that investors were forced to take higher-risk investments such as stocks when the yields are closer to zero.
She told CNBC via email, however that the 10-year Treasury yield is nearing 3% and she believes cash and bonds have become “more appealing alternatives” because you get paid more for taking less risk.
Sweeney suggested that bonds with shorter terms can appear more appealing because significant interest rate rises are already being priced in.
Zach Griffiths, Senior Macro Strategist at Wells Fargo, told CNBC via phone that higher yields could have an impact on future cash flow for the company. This is why it’s important when considering investing in stocks.
According to him, one of the best ways to price stocks is to project the expected level of cash flow that the company will generate. The discount rate (a form of interest rate) is used to calculate the company’s expected free cash flow. It is determined by Treasury yields. The intrinsic value of a company is determined by reducing the cash-flow level to reflect its present cash flow.
The present value (i.e., the amount of future cash flows discounted to the current) is lower when the discount rate for these cash flows to the past is high. Griffiths explained by email that the intrinsic value (or the value to be held in the company) will always be higher than rates because of the time value money.
Griffiths stated that stocks have generally resisted the uncertainties of higher inflation, geopolitical tensions, and a Fed policy more hawkish.
Griffiths said that Griffiths stressed the “psychological” level of a 10% yield on the 10-year Treasury rate, given the fact it doesn’t make much difference from the current rate. Wells Fargo believed the 10-year Treasury yield would finish above 3% in the current year. However, he stressed that it was not the company’s base case.
Take a look at: How to protect your savings as inflation soars