NEW YORK — Normally quiet, the bond market can occasionally send warning signals loud enough to hit stock markets worldwide and even grab the attention of U.S. presidents and other world leaders.
And Fed Chair Kevin Warsh’s decision to signal little about the Fed’s next moves appeared to push longer-term Treasury yields higher amid questions about what the central bank will do to get inflation back to its 2% target. If high yields slow the economy, that puts pressure on the stocks. An economic slowdown would threaten how much profit companies can make, which is the lifeblood of the stock market. High yields undercut the stock market in other ways too. When a Treasury is paying more in interest, that can draw investors away from investments that carry more risk. Why pay record prices for U.S. stocks when a U.S. government bond is paying more than before to wait in relative safety? That’s why jumps in yields can scare politicians even more than swings in the stock market. The Fed also appears more likely to raise its benchmark short-term rate than to cut it. At its last meeting in late July, three Fed policymakers voted to raise the fed funds rates even as nine voted to keep it unchanged.
Because high yields drag on economies and bring downward pressure on stock markets after Wall Street hit records on excitement about big corporate profits and the promise of artificial-intelligence technology, the stakes are high.
“The operation changes almost nothing in terms of the fundamentals, in particular the unchanged need to finance the tidal wave of hyperscaler debt in addition to very large government deficits,” Krishna Guha, an analyst at Evercore ISI, and colleagues wrote in a note to clients.
When yields rise, the U.S. and other governments have to pay more in interest to cover their debts. That’s painful when debt loads for governments worldwide are ballooning as they spend far more than they’re bringing in through revenue.
