We talk a lot on this program about the yield on the 10-year T-note. That’s the interest rate on U.S. government Treasury bonds that investors hold for ten years.
But a different bond has been in the news this week, and that’s the 30-year Treasury note. Yields on 30-year bonds rose above 5% earlier this week and have stayed there.
The longer an investor holds U.S. Treasury bonds, typically, they’ll want a higher interest rate. Because, a lot can change in 10, 20 or 30 years, said Kathy Jones, chief fixed income strategist at Charles Schwab.
“Those buyers you know, definitely are looking at it as a riskier proposition. So 10-year, yeah, there’s some risk premium in there, but not nearly as much as a 30-year,” said Jones.
And right now, Jones said investors see the U.S. as an increasingly risky bet in the long-term.
“So anybody who’s willing to buy, they want to get more yield to compensate them for the added risk,” said Jones.
“The reason is a lack of confidence in the U.S.,” said Campbell Harvey, a professor of finance at Duke University.
The downgrade of the country’s credit rating by Moody’s last week hurt that confidence. So has all the uncertainty with President Donald Trump’s trade policy. And then there’s the ballooning federal debt.
“There’s a perception that the U..S is not going to get its fiscal house in order,” said Harvey.
Already, the U.S. has more than $36 trillion in debt. Add to that the tax and spending bill passed along party lines by the GOP House, and “it looks like the deficit will go up even more, leading to even higher debt,” said Harvey.
Which would mean the federal government needs to woo even more investors to buy even more Treasury bonds.
But appetite for those bonds is waning, said Chuck Tomes at Manulife Investment Management.
At an auction for 20-year treasury bonds this week, “There was less demand from end investors than usual,” said Tomes.
Less demand for a greater supply of bonds could further drive up bond yields.
And those rising interest rates flow through other parts of the economy. Because long-term Treasury yields are closely linked to other kinds of debt, said Harvey.
“For the consumer, it’s the mortgage rate. And for the corporation, it’s their funding rate for evaluating capital projects,” said Harvey.
So, higher long-term yields mean buying a house could get more expensive, and so could the cost of capital investments by companies. Both, Harvey said, would be bad for growth.