Navigating Higher Yields

Over the past several weeks, yields on U.S. bonds have reached their highest level since the early 2000s. While primarily affecting bond investors, rising yields have impacted the stock market as well for a variety of reasons. We want to be as thorough as possible in explaining the causes for the recent rise in yields, how investors are impacted and what the outlook is for the near term.

The greatest contributing factor for the recent climb in yields is the continuing conflict in the Middle East and the resulting energy shock. Higher energy costs carry inflationary risks that investors want to be compensated for in higher yields.

The impact of energy shocks on the rest of the world matters as well for the U.S. bond market. As a country's oil imports become more expensive, its currency becomes weaker. To defend against this, some countries have been selling off U.S. bonds in massive amounts, which pushes up their yield. In the case of Japan, which sold off nearly $50 billion in U.S. debt to support its own currency, the pressure on yields was so great that the U.S. Treasury intervened to avoid a further selloff.

Beyond the impacts of energy shocks, higher yields are also symptomatic of a growing economy. Evidence of that came this week as new data showed signs of increasing business activity and consumer spending, both indicating that the economy could grow faster than previously expected. That creates a more competitive environment where investors can ask for higher returns from both the growing private sector and the government, pushing yields up.

Higher yields affect all kinds of borrowing and investments. The investors most immediately affected will be those in bond funds and ETFs, who will see the value of their shares go down as yields rise. Looking at the iShares 20+ Year Treasury ETF, the price per share has dropped below its lowest level in 2025.

Among the most affected equities will be value stocks, such as utilities and real estate trusts, that offer steady growth in value as well as dividend income to investors. As investors see opportunities for more return elsewhere, these positions get sold off. Real estate in particular becomes less attractive in a higher yield environment, as mortgages and land development become more expensive to finance.

The question on everyone's mind is, how much higher will yields go? Because much of the increase is attributed to the conflict in the Middle East, a resolution that allows for the free flow of energy through the Strait of Hormuz will likely result in yields coming back down. It will probably be gradual, as energy analysts predict the restocking of depleted energy reserves will continue to put pressure on the market. For many investors, a higher rate environment does present opportunities to lock in higher-yielding assets such as bond ETFs and dividend stocks, and we encourage them to reach out to us if they have any questions.

This material is for informational purposes only and is not intended as investment, tax, or legal advice. Past performance is not indicative of future results.