Why Are Bond Yields Rising?

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The question asked of me most often recently: "Why are bond yields rising?"

After verbally answering it plenty of times, it's time to put my answer in writing for everyone else to see. The answer will help you understand what is causing bond yields to rise, and more importantly, it will help you better recognize when the trend may reverse.

Unlike short- and medium-term gyrations in stock prices, which are often due to changes in investor sentiment, the bond market has a more fundamental grounding. Interest rates, representing the cost of money, strongly impact economic activity and inflation in a highly leveraged economy like ours. Thus, economic growth, inflation, and Treasury bond yields are highly correlated.

That said, bond investor sentiment does impact yields and can be relatively accurately quantified, unlike the stock market. In bond market parlance, sentiment is called the "term premium or discount."

There is value in quantifying the term premium or discount. Equally important is, understanding the market narratives responsible for the premium or discount. With such knowledge, one can assess whether the narratives make sense and if the premium or discount is sustainable. If the narrative(s) are illogical, there could be an opportunity to profit when the premium or discount normalizes.

With that, let's better appreciate why bond yields are rising.