Yields on U.S. Treasury bonds are sharply rising as the prospects for economic recovery improve, but those rapid gains are stoking investor fears that the market may be overheating.

Key Facts

The yield on the 10-year U.S. Treasury bond rose to 1.37% on Monday, its highest level in a year. 

Bond yields rise as bullish investors, confident in the prospects of economic recovery thanks to an accelerating vaccine rollout and Biden’s $1.9 trillion stimulus plan, sell their positions in the safe haven investments like Treasuries in favor of riskier plays like stocks and commodities, both of which have also seen major gains this month.

10-year yields have risen nearly 30 basis points this month alone and have climbed steadily since hitting a low of 0.52% during the worst of the economic slowdown over the summer. 

Before the pandemic, the 10-year yield fell from a peak of more than 3% in the fall of 2018 to levels around 1.9% in the final months of 2019. 

“You’ve got everything in your favor at the moment: good news on Covid-19 and stimulus and good earnings,” Patrick Spencer, the managing director at Baird, told the Wall Street Journal

But rising yields aren’t always good for markets: some investors are worried they may be a sign that the stock market is overheating, and experts are confident that rising yields have the potential to slow the stock market’s growth. 

Crucial Quote

“There’s good reasons for yields to go up: economic activity. And there’s bad reasons: inflation,” Mohamed El-Erian, Allianz’s chief economic advisor, told CNBC on Monday. “Economists, even those who have long supported a big fiscal push, are saying be careful. Going big may be too big.”

Key Background

Economists and politicians alike have expressed concerns that Biden’s massive stimulus spending plan is so big that it will push the economic recovery too far, ushering in unprecedented inflation, unsustainable spending, and a disastrous devaluation of the U.S. dollar. White House economic advisor Brian Deese argued that the big spending bill is necessary despite those concerns. “The risks of further scarring in the labor market, the risks of further extending this economic pain, outweigh the risks of doing too much,” he told Bloomberg TV Monday. Treasury Secretary Janet Yellen has expressed the same view. “Inflation has been very low for over a decade…but it’s a risk that the Federal Reserve and others have tools to address,” she told CNBC last week. 


In a research note last week, Moody’s Analytics chief economist Mark Zandi said the biggest risk to the economic recovery is not runaway inflation but overvalued assets (including stocks, commodities, home prices, and even cryptocurrency) that point to speculative markets. Those sky-high valuations are vulnerable to major crashes that could reverberate through the entire economy, Zandi said.

What To Watch For

All eyes will be on Fed chair Jerome Powell this week as he testifies before Senate and House lawmakers on Tuesday and Wednesday. Investors will be watching closely to see if Powell signals that the Fed, which slashed interest rates to rock-bottom levels in the spring to help prop up markets during the pandemic, will tighten policy sooner than expected to keep inflation down during the recovery. “The Fed Chair will need to choose his words very carefully to avoid spooking investors,” OANDA senior market analyst Craig Erlam wrote Monday. “They’re doing a perfectly good job of that themselves and taper talk could tip them over the edge.”

Further Reading

Is The Stock Market About To Crash? (Forbes)

Economy Will Be ‘Supercharged’ After Pandemic But There’s One Big Risk, Moody’s Says (It’s Not Inflation) (Forbes)

Here’s Where $1,400 Stimulus Checks, $15 Minimum Wage And The Rest Of Biden’s $1.9 Trillion Rescue Plan Stand Today (Forbes)

Here’s What Could Spark The Next 10% Market Correction, Bank Of America Warns (Forbes)