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As profit above US Treasury 10 years Financial analysts have described how it could affect people’s finances in some ways closer to 3% – a symbolic level not seen since late 2018.
Last week, the 10-year yield hit 2.94%, the highest level in more than three years. That’s also a huge jump from where it started 10 years ago, at about 1.6%. It makes sense because it is considered the benchmark for rates of all types of mortgages and loans.
High inflation, exacerbated by the Russo-Ukrainian war, has led to concerns that this could affect consumer demand and hamper economic growth. Additionally, there are concerns that the Federal Reserve’s plan to rein in rapidly rising prices by raising its own funds rate and tightening monetary policy more generally could also push the economy into recession. withdrawal.
As a result, investors sold off the bonds, which pushed yields higher because they had an inverse relationship. So what will it mean for your money if that rate hits 3%?
Loans and Mortgages
One consequence of rising interest rates is higher costs of borrowing, such as consumer loans and mortgages.
For example, Schroders investment strategist Whitney Sweeney told CNBC via email that the effect of higher 10-year yields on college loans will be felt by students who take federal loans for the school year. Upcoming.
“The rate is set by Congress, who approved the margin applied to the 10-year treasury auction in May, but stressed that the rate is currently zero for federal student loans,” she said. available due to pandemic relief measures.
Additionally, Sweeney said private variable-rate student loans are expected to rise as 10-year Treasury yields increase.
Sweeney said mortgage rates tend to move in line with 10-year Treasury yields. “We have seen mortgage rates rise significantly since the start of the year,” added Sweeney.
Bonds
Meanwhile, ING Senior Rate Strategist, Antoine Bouvet, told CNBC via email that higher interest rates on government debt also mean higher returns on savings placed in can- fixed income.
“This also means that the pension fund has less trouble investing to pay off a future pension,” he added.
In terms of investing in the stock market, however, Bouvet says higher bond yields are likely to make it a more challenging environment for sectors where companies tend to be more debt-ridden. . This is something associated with tech companies and is part of the reason the sector has been more volatile in recent times.
Similarly, Sweeney points out that when yields are close to zero, investors have no choice but to invest in riskier assets like stocks to generate returns.
But as 10-year Treasury yields approach 3 percent, she told CNBC via email that both cash and bonds are becoming “more attractive alternatives when you get paid more that without taking much risk.”
Bonds with shorter maturities, in particular, can look more attractive, Sweeney said, because this is where significant rate hikes have been priced.
Inventory
Zach Griffiths, Senior Macro Strategist at Wells Fargo, told CNBC in a phone call that it’s important to understand what higher yields will mean for companies’ future cash flows. company when considering investing in stocks.
He says that one way to value a stock is to predict how much free cash flow the company is expected to generate. This is done using the discount rate, which is a type of interest rate, informed by Treasury yields. Discounting back to current cash flow levels gives a company intrinsic value.
“When the rate used to discount future cash flows back to the present is low, the present value of those cash flows (i.e. the intrinsic value of the firm) will be higher than when the rate is low. rates are high due to the time value of money,” Griffiths explained via email.
However, Griffiths said stocks have managed to hedge against uncertainty driven by higher inflation, geopolitical tensions and a more hawkish tone on policy from the Fed.
Griffiths also emphasized that the 3% yield on 10-year Treasury yields is a “psychological level,” as it won’t represent much of an increase from current rates. He said Wells Fargo expects the 10-year yield to end the year above 3% and doesn’t rule it out hitting 3.5% or 3.75%, but stressed that’s not “the base case.” of the company.
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