Bond yields at multi-year highs are fueling the market’s biggest fear

Getty Images / Mario Tama

• The US 10-year Treasury yield surged as high as 3.23% on
  Thursday to its highest level since mid-2011, and other bond
  markets around the world joined the action.
• The increase resulted from strong economic data in the US,
  which fueled speculation the Federal Reserve would hike rates
  quicker than expected.
• Such tightening of liquidity conditions has long been viewed
  by Wall Street experts as one of the biggest risks to markets
  going forward.

Global bond yields spiked across the
board on Thursday, led by stronger-than-expected economic data
and an easing of trade tensions.

The worldwide surge started in the US on Wednesday after
private-sector payrolls beat estimates, fueling speculation that
the Federal Reserve would raise
interest rates more quickly than expected.

The central bank has long stated that it’s closely watching
inflation and the pace of US growth, and new signals of economic
strength are commonly seen as emboldening them as they
tighten monetary conditions.

The US 10-year Treasury
yield climbed as high as 3.23% on Thursday to its
highest level since mid-2011.

Business
Insider / Joe Ciolli, data from Bloomberg

European government bond yields followed their US counterparts
higher on Thursday. Meanwhile, stocks across Asia, Europe, and the US traded
broadly lower. Equities tend to react negatively to rising bond
yields, since they become less attractive compared to their
fixed-income peers.

Underlying these daily gyrations are concerns about what
increasing bond yields mean for the market as a whole. Every time
the Fed raises rates, it constricts money supply, making it more
difficult for companies to borrow money as freely as they have
throughout the ongoing 10-year economic recovery.

The 9-1/2-year bull market in
stocks has been inextricably linked to these easy lending
conditions, while many corporations have taken on massive debt
loads. As such, many experts across Wall Street have
been increasingly sounding the alarm on the potentially
widespread impact of worsening liquidity.

That includes billionaire investor Stanley Druckenmiller, who
recently said in an exclusive interview
seen by Business Insider that liquidity will be the primary
culprit of the next meltdown.

The ironic part of it all is that these concerns all stem from
what is, at its core level, burgeoning economic growth in the US.
But it’s for that very reason that the Fed wants to remove the
unprecedented safety net it placed under markets after the
financial crisis a decade ago.

At the end of the day, the Fed letting the market stand on its
own two feet may be a short-term negative for the risk assets
that have swelled in value under its policy. But it must be done,
and we’re finally getting a taste of how it might play out across
global markets.

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