Bond Yields at 3% Don't Represent a Tipping Point
Options prices show few signs that rates on fixed-income securities will suddenly shoot higher.
Bond traders have a lot on their minds.
Photograph: Bloomberg
When the yield on 10-year U.S. Treasury notes reached 3 percent on April 24 for the first time in more than four years, investors began to wonder whether it represented a tipping point that would cause borrowing cost to surge even higher at an accelerating pace. Options prices, which contain valuable information about the market’s assessment of near-term upside potential and downside risk for a wide range of assets, show few indications that rates will suddenly shoot higher, for two primary reasons.
First, for the rate at which bonds are selling off to accelerate sharply, there would have to be a large and sudden exodus from Treasuries into another, more attractive substitute asset. But across the developed world sovereign debt yields are much lower, at less than -1 percent on German and British 10-year bonds and below -0.5 percent for Japanese government bonds, versus a real yield on the benchmark Treasury of 0.8 percent.