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Bond Yields Rise on the Risk-On Trade

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Basis for long-term interest rates

Ten-year bond yields influence everything from mortgage rates to corporate debt. Now, they’re the benchmark for long-term US interest rates. Some investors might remember when the 30-year bond was the benchmark. However, that changed in the 1990s. When investors want to know what’s going on in the bond market, they want to know where the ten-year bond is trading.

You should note that short-term rates are still important, particularly LIBOR. It’s the base rate for most short-term rates. Rate information is relevant to REITs like American Capital Agency (AGNC), Annaly Capital Management (NLY), Redwood Trust (RWT), and MFA Financial (MFA).

Investors can trade the REIT sector through the iShares Mortgage Real Estate Capped ETF (REM) or the whole financial sector through the S&P SPDR Financial ETF (XLF).

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Bond yields rose slightly

After closing out the prior week at 1.8%, bond yields—as tracked by the iShares 20+ Year Treasury Bond ETF (TLT)—rose by 14 basis points to 1.9%. While housing data were weaker than expected, stocks were strong and investors sold Treasuries on the “risk-on” trade.

Despite the overall bid for Treasuries, bond issuance has been relatively muted this year. The financial markets remain inhospitable for most big corporate deals. In fact, most of the bond issuance this year was related to mergers. While carnage in the energy exploration and production space impacted bond issuance and some buy-side firms, it hasn’t really spread to the Market and the economy as a whole.

The mortgage REIT sector has been relatively under-leveraged since the “taper tantrum” of 2013. The biggest change in the sector has been the move to swap interest rate risk for credit risk. Mortgage REITs have dry powder, or undrawn capital, if they want to build up their balance sheets again.

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