over 1 year ago • 2 mins
The yield on the benchmark 10-year Treasury just soared above 4%, its highest level since October 2008. Such a sharp move (it was at 1.5% at the beginning of the year, and around 2.5% in August) only means one thing for your portfolio: risks are building very quickly.
If Treasury yields are rising so high, so fast, it’s because the Federal Reserve (the Fed) has been hiking rates aggressively to achieve what its mandate requires: taming stubbornly high inflation.
But two other factors may be exacerbating the move right now:
To stop the yen from collapsing, Japan has been buying up yen in the open market. But to buy yen, they need to sell US dollars. And while they’ve got a decent chunk of them in their massive $1.33 trillion reserves, they might eventually run out depending on how much they need to sell. And if their reserves run out, they’d potentially be forced to sell US Treasuries to get those precious greenbacks. And if such a massive player is at risk of dumping their Treasuries, you can understand why their prices drop (and yields rise) so quickly.
Market liquidity is very thin right now. This means that there are generally few buyers and sellers active in the Treasury market. So when there’s a sudden increase in sellers, the lack of buyers means that prices are moving very quickly until they reach a level that draws in new buyers.
Soaring Treasury yields are terrible news for your portfolio. They’re not just negatively impacting most assets directly (a higher discount rate means that future cash flows are worth less today), but also indirectly by suppressing economic growth (we wrote about how here) and reducing the amount of credit available to borrowers.
Put differently, when interest rates rise that fast, they make it more likely that all assets will fall at the same time, which makes portfolio diversification a bit useless, at least in the short term. There’s only one safe haven in this environment: US dollar cash. But on the bright side, its yields are starting to get really attractive…
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