10-year bond yield soars to 2.64%
Bond investors, take a deep breath. The bond selloff is overdone -- for the moment.(Photo: Spencer Platt, Getty Images)
The sell-off in government bonds picked up steam early Monday, as the 10-year Treasury note spiked to 2.64%, it's highest level since August 2011 and up more than a percentage point since early May.
Investors have been bailing on bonds with greater urgency since Wednesday, when Federal Reserve chairman Ben Bernanke said the central bank would start phasing out its bond-buying program later this year if the economy continues its upward trajectory.
Rising yields are problematic for the housing market, which has been a key driver of the economic recovery, because it increases mortgage rates. If the sharp rise in yields continues, it could slow economic growth and crimp the profit-making power of Corporate America.
The sharp rise in bond yields will be costly for bond investors, adds Paul Schatz, president of Heritage Capital.
"For the past month, the bond market has seen some of its worst carnage since 1994 for those who remember that frustrating and challenging year," he says. "Yields are up more than 50% on the 10-year note and when bond mutual fund investors get their June statements, I think they will be shocked at how much money they lost in such a short period of time."
Rising yields also could hurt stock prices as it could cause investors to turn more cautious and reduce their willingness to take the risk of buying stocks that many analysts view as oversold. Since the May 22 intraday high of the Dow Jones industrial average, it has plunged 5.5%.
The Fed has been buying $85 billion a month in long-term Treasury bonds and mortgage-backed securities to keep interest rates low -- in an effort to boost economic growth and job creation.
The 10-year note was yielding just 1.63% on May 2. After Bernanke's more hawkish statements on monetary policy, -- following a two-day Fed policy-making session -- the yield jumped to 2.31% from 2.17% in one trading session. The increase has accelerated since then.
In the aftermath of the 2008 financial crisis, bonds had been viewed as a haven, and hordes of investors flocked to government bonds for their perceived safety. Many market commentators say the Fed's aggressive "easy money" policies and the massive inflows to bonds and bond funds -- helped create a bond market bubble.
"The secular bull market that began in 1981 has been incredibly kind to bond investors and they are not at all accustomed to what's going on now," says Schatz.