Bond Market Sell-Off: Is It Really Safe to Invest Right Now?

If you haven't heard about it already, there's a massive sell-off in the bond market.

Holders of government bonds have been unloading them in reaction to outsize U.S. debt and elevated inflation, sending their prices lower and their yields, which move in the opposite direction of price, higher.

On Monday, the yield on the 10-year Treasury note rose above 5% for the first time since late 2023. And even back then, it remained above that level for just one day. The 10-year yield is now a full percentage point higher than it was before the Iran war began.

And it's not just the 10-year Treasury note. The yield on the 5-year Treasury note has been rising dramatically since February, as has the yield on the 30-year note.

Image source: Getty Images.

Often, when bond yields spike, it can mean a stock market correction is imminent, as investors grow increasingly nervous about the economic damage higher government bond yields can cause by raising borrowing costs.

In fact, a recent Bloomberg survey found that about a third of respondents said that 10-year yields rising to between 5% and 5.25% would be enough to trigger a 10% correction in the stock market. Another 22% said yields would need to climb above 5.25%, and another 26% believe yields need to exceed 5.5% to trigger a correction.

So, there is certainly a good deal of concern in the market about rising yields and their potential impact on stocks.

There are reasons not to worry too much about rising yields

But I don't think investors need to worry too much at the current moment, and here's why.

First, the sell-off in bonds this year has been relatively gradual and orderly. Bond yields have been rising since the beginning of the Iran war in late February, and the 10-year is now one percentage point higher than it was then. There haven't been any major episodes of panic selling.

Second, if you look at yields historically, you'll see that a 10-year yield below 4% is the anomaly, not the norm. That yield drifted below 4% after the great financial crisis and the very gradual economic recovery that followed, amid easy monetary policy by central banks attempting to juice their economies. Yields dipped further in response to the COVID-19 pandemic for similar reasons.

But go back a bit further, and you'll see that the 10-year yield was in the 4% to 5% range for many years, and even higher. So, the recent increase in yields is a return to the historic range.

Finally, the Federal Reserve's monetary policy committee meets this week and will announce any change to its benchmark interest rate on Wednesday afternoon. Futures markets put the chances of a rate hike at the meeting at about 92%.

I think futures traders have it right. And a rate hike to address elevated inflation should relieve some of the upward pressure on yields, as bond investors regain confidence that the Fed will act on inflation.

The bottom line is that it is still safe to invest in stocks. We should, however, keep an eye on bond yields.

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