Treasury Yields Are Rising: What Will That Mean For Stocks As Investors Pivot To Government Bond ETFs?

Yields on U.S. Treasury notes have been rising consistently throughout February, putting stock prices on the line.

The 10-year treasury bond came a hair’s breadth away from reaching the psychological mark of 4% on Wednesday, at 3.95%. Currently, yields stand at 3.92%.

High yields on treasury bonds normally pose a risk for stock prices, as investing in a risk-free asset like a fixed rate bond can become more attractive than equities, provided yields are high enough.

Related: Does It Even Make Sense To Own Stocks With Treasury Yields At 4%?

Yields on the 10-year treasury note dropped slightly on Wednesday after the minutes from the latest FOMC meeting were released.

Still, Wednesday's yields were the highest they’d been since November 2022, when they marked their highest point in over 14 years (since 2008). Yields on the 2-year treasury note are 4.6% at the time of writing and peaked at 4.72% on Tuesday.

Bloomberg reported an inflow into government bond ETFs of at least $2 billion on Wednesday. 

The SPDR Portfolio Short Term Treasury ETF SPTS gained $908 million Wednesday morning, its biggest influx of funds in three years, according to the outlet. The iShares 20+ Year Treasury Bond ETF TLT and the SPDR Bloomberg 1-3 Month T-Bill ETF BIL also received inflows of hundreds of millions.

ETFs following the S&P 500 on the other hand, lost billions. At least $1.1 billion were withdrawn from each the SPDR S&P 500 ETF Trust SPY and iShares Core S&P 500 ETF IVV.

Investors also dropped corporate bond ETFs like the SPDR Bloomberg High Yield Bond ETF JNK, which lost $1 billion in outflows.

Fixed-rate bonds tend to drop in price with rising interest rates, bringing their yields up. This makes the prospect of further hikes of the federal funds rate a good thesis for investing in government bonds.

This idea is further supported by the fact that more monetary tightening by the Fed should have a negative impact on economic growth, causing company stock prices to head lower.

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