U.S. national treasury yields and how to act on...
In recent weeks one of the most talked about topics by various financial market specialists has been the performance of U.S. Treasury yields. The rise in yields of the 2, 10 and 30-year notes has been very strong. As a result, financial markets have reacted as we will see below.
For context, the U.S. Treasury is the government department responsible for issuing all bonds, notes and bills. Issues made by the U.S. Treasury are considered a low-risk investment because they are backed by the full faith and credit of the U.S. government. Investors who purchase U.S. Treasury notes or bonds receive coupon payments semi-annually; and at maturity the face value of the bond. As a global benchmark, within all products issued by the U.S. Treasury, the main reference for the economic situation is the 10-year Treasury.
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The relationship between price and yield is inversely proportional. Therefore, one understands that a massive sale of a product causes the price to go down and therefore the yield to go up. A massive purchase, on the other hand, drives the price up and the yield tends to go down. Transporting this concept to the world of financial markets... If we observe that the yield goes up, this could mean that investors demand a higher yield to hold this product. They may therefore prefer to move their investments to other asset classes in search of a higher return.
This is one of the reasons why the movement of 10-year treasuries is considered to be indicative of global economic and market sentiment. On the other hand, it is important to consider that with the prospect of high inflation, real yields will be greatly affected. Therefore, investors tend to look for assets that generate a higher return in order to compensate for rising prices.
Now, the movement of the national treasury yield directly affects different lending rates. For example, the mortgage rate or the lending rate at which companies borrow money for their various projects.
On this last point, the stock market has two main sectors of companies. One is the Value (Companies in a more mature and defensive business stage). The other is the Growth (Companies in expansion stages, higher volatility). The latter companies tend to be more sensitive to changes in rate movements; this is due to their high valuations and high growth expectations.
U.S. national treasury yields.
Below we can see how in the last two months as the 10-year treasury yield has risen, the value sector (MXWO000V) has suffered a smaller decline compared to the growth sector (MXWO000G) in terms of total return. On the other hand, we can see how sectors such as energy (XLE) and financials (XLF) have outperformed a sector more sensitive to these variables such as technology (XLK).
