Current bond yields rise -- Good for money market funds

June 13, 2006

Current yields on 10-year Treasury bonds have risen to levels above 5%, a level not seen since last July, when yields were between 5-5.25% throughout the summer. This was the longest stretch of high Treasury bond yields since the recession ended in 2002.

Stock markets fell as investors became fearful that current bond yields would rise even higher.  (Source: CNN Money, “Stocks slump as bond yields jump,” 6/12/07, Federal Reserve, "Selected Interest Rates")

What the rise in current bond yields means:
If current bond yields stay above 5%, or rise even higher, several things would happen:

• Less money would be available for private equity firms, like the Blackstone Group. Their investments in the stock market have kept stock valuations high.
• It would further indicate that foreign investors, like China, are less interested in purchasing U.S. Treasuries. This would mean less support for the U.S. current account deficit, which funds the U.S. lifestyle.
• Higher Treasury yields would further depress the U.S. housing market, as mortgage interest rates closely follow these yields.

Action steps:
As I have been saying for awhile, if you have money you can’t afford to lose, a money market fund would be a good place to park it untill we find out if interest rates continue to rise. If they do, that money will earn more and be safe while money invested in stocks and bonds decline. If interest rates stabilize, and the economy starts to improve, there will be plenty of time to reinvest in mutual funds.

Current bond yield related articles:
China invests $3B in U.S. company, 5/23/07
Paulson to visit China, 3/7/07
Profit from China’s Growth

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treasury bond yields