What's going on?
While bonds often aren’t given as much attention as stocks, they’re extremely important – and they’re selling off sharply this week!
What does this mean?
Bond yields (a.k.a. interest rates) in major economies like the US, Germany and Japan all hit their highest levels in months on Thursday (remember: as bonds go down in price, their interest rates (a.k.a. yields) go up – why? Click here).
Investors are effectively saying: “If I’m going to lend you money, you’re going to have to pay me a higher interest rate.” Why? Partly because investors are betting on increased global growth, and if everyone else is going to make more money (as improved growth, in theory, should lead to greater profits for companies, and higher prices for stocks), then bond owners want a higher return too. Also, central banks have more aggressively signaled that they’ll soon use their power to push up interest rates, which feeds through into the bond market (e.g. if a central bank will pay an investor more interest, they will sell a bond and lend money to the central bank instead).
Why should I care?
The bigger picture: There are various reasons why investors are predicting higher growth.
For one, all major economies appear to be performing relatively well, at least compared to recent years – and investors are betting this will continue. More specifically, a proposal for a new American tax plan was launched on Wednesday – and it’s largely viewed as good for the economy, at least in the near term (although it’s not yet clear that it will be passed into law).
For you personally: The interest rates you pay are likely to start, slowly, going up.
Mortgages, for example, are typically closely related to bond yields: as bond yields go up, mortgage rates tend to rise as well. Other borrowing rates are also likely to be pushed up by higher bond yields, at least in some way. Bond yields remain at a historically low level, but they are moving higher – which is worth being aware of.