2-Year Bond Yield Nears 4%, Changing Investment Calculations... Money Moves into Bonds

[Asia Economy New York=Special Correspondent Joselgina] Due to the Federal Reserve's (Fed) aggressive tightening, U.S. Treasury yields have surged to their highest levels in over a decade. The yield curve between short- and long-term rates has also widened to its largest gap in 22 years, intensifying recession concerns and changing investors' calculations. The long-held belief during the prolonged low-interest-rate environment that "There Is No Alternative (TINA)" to stocks is breaking down, with bonds gaining attention as an alternative investment.

On the 19th (local time) in the New York bond market, the yield on the 10-year U.S. Treasury briefly surged to 3.518%, surpassing the psychological resistance level of 3.5%. This is the highest level since April 2011. The 2-year Treasury yield, which is sensitive to monetary policy, also jumped to 3.94%, marking a 15-year high.

During the day, the yield spread between the 2-year and 10-year Treasuries widened to 46 basis points (1bp=0.01 percentage point), the largest since March 2000. The inversion of short- and long-term yields is generally considered a precursor to a recession.

The recent sharp rise in Treasury yields is largely due to the Fed's tightening measures. At the upcoming September Federal Open Market Committee (FOMC) regular meeting on the 20th-21st, a rate hike of at least 0.75 percentage points is widely expected.

Since the beginning of this year, the Fed's consecutive rate hikes have pushed Treasury yields sharply higher, significantly increasing the attractiveness of bonds as investments. The WSJ reported, "Wall Street has long believed that stock returns always outperformed bond yields, hence the 'There Is No Alternative' stance, but this dynamic has reversed this year."

According to the Wall Street Journal (WSJ), with the 2-year Treasury yield sensitive to monetary policy approaching 4%, only 16% of S&P 500 companies have dividend yields higher than the 2-year yield. Furthermore, fewer than 20% of companies have dividend yields exceeding the benchmark 10-year Treasury yield. This is the lowest proportion since 2006.

Katie Nixon, Chief Investment Officer (CIO) at Northern Trust, assessed, "Now is the time for investors to consider whether they need to take on stock market risks." Given that investing in stable Treasuries can yield as much as 4%, there is no compelling reason to bear the risks of investing in riskier assets like stocks.

The market is now closely watching how long the Fed will continue raising rates and how high they will remain. The Chicago Mercantile Exchange (CME) FedWatch tool projects year-end rates reaching 4.25% to 4.50%.

Goldman Sachs forecasts that the Fed may continue with giant steps (0.75 percentage point rate hikes) in November and December. Nomura Securities expects the federal funds rate to rise to 4.75% next year. Deutsche Bank's North American chief economist even predicts it could reach 5%.

As money flows into bonds, it poses another negative factor for the stock market. Since the beginning of this year, the S&P 500 index, composed of large-cap stocks, has fallen by more than 18%.

This content was produced with the assistance of AI translation services.