If the Bond Market Sell-Off Triggers a Recession, Decades of History Says Investors Should Do This 1 Thing
One of the biggest trends that stock market investors are watching right now is something that might seem unrelated to stocks: bond prices and bond yields. The bond market is going through interesting times. Maybe not in a “good” way.
In the past few months, global bond yields have surged. The widely watched yield on the 10-year U.S. Treasury bond has climbed from about 4.03% one year ago to about 5.24% as of Oct. 11. The 10-year yield is reaching some of its highest levels since 2002. This is what’s known as a bond market sell-off. Bond investors are refusing to buy bonds unless they get paid a higher yield for their money.
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10 Year Treasury Rate data by YCharts
Do higher bond yields mean a recession is coming? Will high bond yields cause a stock market crash? The answer to both questions is: not necessarily. It’s important to be cautious about bond yields, but not to over-react. Long-term stock market investors have many reasons to be hopeful — and stay the course.
Let’s look at what higher bond yields might mean for the stock market — and what investors should do now.
What higher bond yields mean for the economy and stocks
Higher bond yields mean higher interest rates on debt. Consumers and businesses have to pay more to borrow money. Fewer people and businesses take out new loans. Less new money gets created by banks by issuing loans, and less money flows into the economy as a result.
When bond yields go up, that can sometimes bring bad news for the stock market. Higher bond yields can be a warning sign of financial crises. When bond yields spike, this might mean that global bond investors are worried about high levels of national debt, and are acting as “bond vigilantes” who crack down on government borrowing. Higher bond yields can be a way of the bond market lowering the “credit score” of governments.
Much of the recent spike in bond yields has happened during a big rise in U.S. government borrowing since the 2020 pandemic. U.S. national debt recently passed $40 trillion. Here’s what has happened to the 10-year Treasury bond yield as our national debt has risen since 2002:
10 Year Treasury Rate data by YCharts
Can higher bond yields cause recessions?
When bond yields go up fast enough, they can even tip the economy into recession. That’s because when borrowing costs get too expensive too fast, parts of the economy start to break down. Some businesses and industries are more vulnerable than others to rising bond yields.
