Certain aspects of the market can feel enigmatic to the average retail investor. One of those aspects might be bond yields, which are currently rising. Bond yields rose as much as 48 basis points on Feb. 25 which is the highest in a year.
Rather than an abstract concept, rising bond yields do impact the market as well as the individuals who make it up.
How bond yields impact the market
This week, tech stocks have been on the struggle bus as bond yields continue to rise. This is consistent with the way rising bond yields have a negative impact on equity securities.
A bond yield on a U.S. government security means returns that investors get for their bond loans. A rising bond yield means heightened returns. Bonds can rise from economic growth or inflation.
With threats of inflation currently stemming from economic stimulus, the prospect of the Fed having to pay out those higher returns is good for those invested in bonds who are pulling them out, but not so good for the rest of us.
However, inflation outcomes still aren't certain. Economic growth could be upon us, in which case equities will recuperate quickly (just as they did after the market crash at the start of the COVID-19 pandemic). In contrast, a long-term inflation surge might mean a more strenuous uphill battle.
How bond yields impact your 401(k)
After a phase of bond prices rallying, now bond yields are rallying. Coming soon.— Kalpen Parekh (@KalpenParekh) February 26, 2021
How bond yields impact your 401(k) plan depends on your particular investment strategy. Factors include, but aren't limited to:
- How much you have in money market funds (which pay a floating, or guaranteed, interest rate)
- Whether you're invested in small, medium, or large-cap companies
- When you plan to tap into your retirement fund
A shorter time horizon, a heightened cash factor, and a heavier weight given to large-cap companies could have a negative impact on your 401(k) during times of rising bond yields. However, a longer time horizon might make the issue a moot point.
How bond yields impact your mortgage
Rising bond yields equate to pricier mortgages. The 10-year Treasury yield operates closely with the 30-year mortgage rate.
The past year has undoubtedly been a buyer's market, but higher interest rates in government securities could quell the enthusiasm. This could actually regulate the housing market. Buyers have been practically fighting over contracts and forgoing inspections just to land in escrow before someone else. But if it goes too far, the housing market could suffer serious consequences.
How bond yields impact your car note
In the same way that mortgages become pricier during times of rising bond yields, car loans do as well. In general, borrowing money is more expensive at a time like this.
This could impact the new car market's resurgence after the COVID-19 pandemic, but it ultimately depends on how sustained inflation proves to be and whether or not the economy will grow. Pre-owned cars might continue to see increasing popularity even after commutes return at full force.