For a while now the theme of "higher for longer" has dominated market speak -- that's the idea that the Federal Reserve will keep interest rates elevated for a prolonged period of time to bring interest rates down.
But a rise in long-term Treasury yields could be doing some of that work for the Fed and may put an end to the past 19 months of historic interest rate hikes meant to tamp down inflation.
It's no longer "higher for longer," said Steve Sosnick, chief strategist at Interactive Brokers, it's just "high for long."
What's happening: 10-year Treasury yields are flirting with 5% for the first time since 2007, before the global financial crisis. The 30-year fixed rate mortgage has been advancing towards 8% — a level not seen since the dot-com bubble popped in 2000.
Rates may fluctuate, but it's clear that we're in the middle of a paradigm shift, said Rob Almeida at MFS Investment Management. It's unlikely that rates will return to pre-pandemic lows, he said.
There are a few reasons that the 10-year has advanced so quickly since last year, when it sat around 4%: Strong economic growth and elevated inflation tend to push yields higher. The US Treasury has issued a lot of government debt in recent months, and with expensive wars in Ukraine and the Middle East looming, more could be coming soon. Those things bring down bond prices and push yields higher, attracting buyers.
Regardless of why it's happening, for American consumers, an elevated 10-year Treasury return means economic pain: more costly car loans, credit card rates and even student debt.
It also means more expensive mortgage rates. Mortgage rates tend to track the yield on 10-year US Treasuries. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.
But what's bad for the economy tends to be good for bringing prices down. Fed officials, including Powell, have indicated that rates could be high enough to help lower inflation towards their target goal of 2%. But they're leaving the door open for further hikes based on future economic data.
"Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening," Fed Chair Jerome Powell said during a discussion at the Economic Club of New York on Thursday, adding that the Fed will "remain attentive to these developments."
Markets believe him, and investors seem to think Fed members will keep interest rates the same at the central bank's next two-day policy meeting, beginning on Halloween. Financial markets currently see a 99% chance the Fed will continue to pause rate increases, according to the CME FedWatch Tool. That's up from 93% on Wednesday.
The Paul McCartney portfolio rule: So what should investors do with this information?
In the very botched words of Paul McCartney: Let your portfolio be.
"If you think of an investment portfolio like a rock band, bonds would be the bass guitar," said Darrell Cronk, chief investment officer of wealth and investment management at Wells Fargo.
The bass can fade into the background, but it plays a critical function in keeping the band's rhythm and tempo.
During bull markets, bonds, or Treasuries, often go ignored, but provide a steady stream of income during more volatile times.
"It's rare that a bass player steps to the front of the stage, but that's exactly what US Treasury securities have done over recent months," said Cronk.
"Investors would be wise to listen to the rhythm and tempo of the data," he said. And right now the data is saying to respect the lag of tightening monetary policy and sit tight.
"The green and red lights may flash, and the wailing lead singers on your television screen may try to convince you that this time will be different, but from the back of the stage, the quiet bass guitarist provides the rhythmic repetition that grounds the music in fundamentals tested through time," said Cronk.
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