The cost of money has been rising significantly
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U.S. real yields are rising, meaning the cost of borrowing money is again turning positive — at least for longer maturities.
Why it matters: Borrowing money has essentially been free for quite some time, benefiting big companies (and governments) by allowing them to accumulate huge sums of debt that have little real cost.
- Negative real yields — the value of U.S. Treasury yields minus inflation — have been a major justification for extreme price-to-earnings ratios for U.S. stock exchanges, particularly the Nasdaq.
State of play: The yield on 30-year Treasury Inflation-Protected Securities, aka real yields, turned positive on Friday for the first time since June 2020, according to Tradeweb data, punctuating a sizzling pickup that has been brewing over the last week.
- 30-year real yields have risen 27 basis points from their Feb. 10 close and are up 40 basis points so far this year.
- 10-year yields remain negative but have risen by 25 basis points since Feb. 10.
Be smart: "This means the economy is on the mend; so it’s not unhealthy that real yields are rising," Mark Holman, CEO of TwentyFour Asset Management, told Bloomberg.
- "But I caution that if real yields rise too quickly, then that’s a problem for all asset classes. It’s the speed of the change that could be a worry."
The big picture: Increasing inflation expectations have sent nominal Treasury yields to their highest levels in nearly a year for 10- and 30-year maturities, with breakeven rates — which measure inflation expectations over time — rising to multiyear highs as well.
- The difference between yields on the 5-year and 30-year Treasury bonds rose to the highest since 2014.
What to watch: A main reason for the increasing yields has been the Fed’s insistence that it won’t put the brakes on its easy-money policy and will allow for prices to run above its 2% target for "some time."
- New York Fed President John Williams said on Friday that he is not worried that too much government spending could overheat the U.S. economy.
