There are a couple of recurring themes that have seemed to dominate the financial news in recent weeks: the rise of the major indexes to record highs in equities and the steep rise in treasury yields. Since growth and interest rate expectations factor into both moves, these two headlines may seem like two sides of the same coin; yet there is a major difference between the two.
The Dow Jones Industrial Average reached an unprecedented 19,750 on Friday and has now seen 14 record closes since November 8. The S&P 500 and NASDAQ have both gained steadily and hit at least one record high in that time period as well. Meanwhile, the 10-year treasury yield has hit a high that hasn’t been seen for… about a year. Despite the significant level of press given to moves in this rate, things look about the same as they did this January. In fact, Friday’s close of 2.47% is just 16 basis points higher than it was on December 30th of 2015 and is actually lower than the 2.50% yield that peaked on June 10, 2015.
The point is not to completely downplay the importance of this move in yields. As far as treasuries go, the 10-year Treasury note is widely followed. A large number of interest rates in the broader economy are based on its yield and it is one of the most popular debt instruments in the world. As a result, the rise in treasury yields over the last month has been noteworthy. The context of this move, however, is that the current rise is not markedly steeper than the decline that was experienced as recently as this January.
Bottom line, the current move in U.S. sovereign debt yields should be viewed less as a paradigm shift and more as a recalibration from the drop that preceded it.