The 30-year Treasury yield has climbed above 5.2%, its highest level since 2007, reviving fears of a stock market sell-off. History shows high bond yields have preceded downturns before, but the Motley Fool notes the pattern doesn't repeat precisely, and long-term investors don't need to panic over the move.
The 30-year Treasury yield recently rose above 5.2%, a level not reached since 2007. The last time yields climbed this high, stock market crashes followed. The highest 30-year Treasury yields this century came in 2000, just before the dot-com crash.
That timing raises an obvious question: is the bond market signaling it's time to sell stocks? Not necessarily, according to the Motley Fool. History doesn't repeat itself precisely, and bond yields don't always predict a downturn in stocks.
Why higher yields pressure stocks
Rising Treasury bond yields raise borrowing costs for the government, businesses, and consumers. More expensive money often means less spending in the economy, fewer home and auto purchases, and less business investment, which can pressure share prices. Higher fixed-income yields can also pull investors out of stocks and into bonds. Earning 5.2% a year for 30 years from risk-free Treasury bonds makes stock market risk less appealing to some investors.
A warning sign, or a healthy economy
Higher bond yields could mark the start of a serious stock sell-off and a government debt crisis, or they might not. A high yield isn't automatically a warning signal. It could instead reflect a fast-growing economy and a bond market seeking better compensation for inflation and the long-term risk of lending to the U.S. government.
Most of the time, long-term investors should stick with their plan and keep buying a diversified stock portfolio such as the Vanguard S&P 500 ETF (VOO), which has delivered average annual returns of 15% over the past 16 years, including through the run-up in bond yields over the past six years. Investors who want more bond exposure can consider the Vanguard Total Bond Market ETF (BND), which is paying a 30-day SEC yield of 4.71%.
Don't overreact to the move
Bond yields can fall as well as rise. A 1% to 5% decrease in S&P 500 share prices is not a reason to panic, and neither are slight increases in bond yields. Instead of a warning sign, the move could simply be the bond market working as it should. Stocks don't have to crash because of it.
Source: The Motley Fool
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