U.S. 10-Year Treasury Yield Soars! Stock Market Crashes! Oil Rises, Gold Falls!

Over the past week, U.S. stocks plummeted sharply, including top tech giants that were once market favorites—such as Amazon, Microsoft, and Alphabet—all suffering steep declines. Many investors are left in despair, lamenting how "brutal" stock trading has become and joking that they’ve been "scared away" from the market!

Behind the stock market crash, experts unanimously point to one key indicator: the 10-year U.S. Treasury yield.

What Is the 10-Year Treasury Note?

U.S. Treasury Securities refer to government debt instruments issued by the U.S. Department of the Treasury on behalf of the federal government.
• By issuance method: They are categorized into paper certificates, bearer bonds (also called physical券式国债), and book-entry securities.
• By maturity period: They are generally classified into Treasury bills (T-Bills) (short-term), Treasury notes (T-Notes) (medium-term), and Treasury bonds (T-Bonds) (long-term).

The 10-year Treasury note refers to a dated government security - specifically, a Treasury obligation with a fixed 10-year term from issuance date to maturity.

Recently, the upward trend of the yield on ten-year US Treasury bonds has accelerated significantly. In early January, the yield on US Treasury bonds had just surpassed 1.0%, but by February 25th, it had already climbed to 1.5%. This increase of 0.5 percentage points in less than a month has sent shockwaves through the market. As of March 7th, the yield on ten-year US Treasury bonds had climbed to 1.577%, officially announcing a return to pre-pandemic levels.

Causes and Impacts of Rising Treasury Yields

The fluctuation in the interest rate of ten-year treasury bonds reflects expectations about the economic situation. If the overall economy is optimistic, the interest rate of ten-year treasury bonds will rise, and vice versa. For example, the Biden administration's new round of fiscal stimulus policy worth $1.9 trillion is about to be implemented, which will provide the American people with additional cash. On the other hand, with the continuous acceleration of vaccination in the United States, the epidemic situation is continuously improving. These two major positive news are undoubtedly a significant stimulus to the overall economic trend of the United States, leading to an increase in treasury bond interest rates.

Q: What are the impacts of rising Treasury yields?

A: You may have noticed that as the yield of the US 10-year treasury bond bond continues to rise, the recent oil price has also started to soar. Under the general trend of economic recovery, the US inflation in the second quarter may exceed the Fed's inflation target of 2%.

Impact 1: Rising oil prices

Under the current economic situation, there is a positive correlation between crude oil prices and ten-year interest rates, and the two affect each other. The rise in crude oil prices has driven up inflation expectations, resulting in an increase in US bond yields. The rise in 10-year US Treasury yields will also have an impact on crude oil prices.

According to the latest data released by the US Department of Labor, in the composition of the US Consumer Price Index (CPI), the highest weight is residential, accounting for over 40%, followed by food and beverage, and transportation, with weights of around 15% each. Among them, the energy weight is only about 6%. Although the energy weight is relatively low, due to the large fluctuations in crude oil prices, this 6% is enough to affect the overall situation. Although the economy has begun to recover, it has not yet returned to normal. At the current stage, the demand for crude oil is strong, but under the current crude oil production reduction agreement, the gap between supply and demand of crude oil is still huge, leading to an increase in existing oil prices.

Impact 2: The decline of gold

The continuous rise in the interest rate of the 10-year treasury bond means that the gold price is highly likely to decline. From the historical trend, the gold price and the yield of treasury bond show an amazing negative correlation.In other words, the higher the yield of treasury bond, the lower the transaction price of gold, and vice versa.Taking advantage of the high interest rate of 10-year treasury bond, it may be a good opportunity to start gold. The volatility of US Treasury bonds and gold prices reflects the cost of holding gold.

Once the real yield of treasury bond continues to rise, the cost of holding gold will also rise relatively, leading to a decline in investment demand, and gold will begin to fall. The previous round of gold price decline was also due to the Federal Reserve's adjustment of US bonds, which led to a significant increase in US bond yields and the beginning of a downward cycle for gold.

US stock market declines, especially in high valuation sectors

The upward trend in the yield of 10-year US Treasury bonds can also lead to a decline in the US stock market, which is also the reason why investors have been crying recently (the editor no longer wants to open Robinhood). The rise in US bond yields means that the financing costs of companies are increasing, especially in high valuation sectors. If companies cannot get money and face huge stock pressure, they will naturally fall. For example, from a historical trend perspective, there is a clear negative correlation between the dynamic valuation of the S&P 500 and the actual yield of US Treasury bonds.

Not long after the former Biden administration took over power, policies across the United States were fluctuating. In addition, during the critical moment of fighting against the epidemic and receiving vaccines, fluctuations in the capital market are inevitable, and there are also many variables that we cannot predict.

Both the US stock market and Chinese funds have been in a state of downward adjustment recently. In fact, any investment carries risks, not only in the stock market, but also in other financial products. Therefore, caution and prudence are necessary before investing. We can enjoy small investments and use them as entertainment, but we must avoid investing too much, which can hurt our health and cause sadness.

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