THE great mysteries of the ages:
What killed the dinosaurs?
Did aliens help build the pyramids?
And why were investors willing to accept such low yields on long-term bonds in recent years?
The sudden end of that gracious acceptance of paltry returns has been Topic A in financial markets worldwide in the last few weeks. The annualized yield on the 10-year U.S. Treasury note, a benchmark for mortgage and other long-term rates, surged to a five-year high of 5.3% on Tuesday before falling back by week's end to finish Friday at 5.16%.
The bond market's conniption has been a global affair. Europe, Japan, Canada, Australia, India — almost anywhere you look, yields are up sharply this spring, and particularly just since May.
This trend had all the earmarks of a financial market calamity because everybody knows that rising interest rates are bad news.
Or maybe not so bad. Stock markets around the planet hiccuped in the first week of this month as rates continued to climb. But last week, stock bulls couldn't stay away any longer. The Dow Jones industrial average ended the week at 13,639.48, a mere 0.3% below its record high reached on June 4. Many foreign markets finished at record or multiyear highs.
Stock investors may be irrational from time to time, but in this instance there may be a good reason they aren't terribly flustered by higher interest rates: They've figured for quite a while that rates, specifically long-term bond yields, were bound to rise with an expanding global economy.
Bond yields were so low from 2003 through 2005 that the phenomenon was dubbed a "conundrum" by former Federal Reserve Chairman Alan Greenspan
Whatever reason investors had for accepting low yields, they're no longer so accommodating. To which world stock markets appear to be saying, "Welcome back to reality."
Rising bonds yields "are a shock, but in actuality we're just going back to the way things should be," said George Goncalves, a Treasury-bond strategist at Morgan Stanley in New York.
But why now?
