Just a year ago, plunging government bond yields convinced some investors they would never see 6 percent again. Eight percent seemed out of the question.
Now 8 percent yields are back, but many investors are standing on the sidelines, scared to buy in fear that 9 percent is just around the corner.
The yield on the 30-year Treasury bond hit 8.04 percent Monday, the first close above 8 percent in more than two years. Treasury bills auctioned Monday went for the highest rates in three years, with the six-month bill yielding 5.51 percent.
The culprit? Economic growth.
"Rates will continue to drift up until we get positive evidence the economy is going to slow," said Charles P. Smith, manager of the T. Rowe Price New Income Fund. The fund is part of Baltimore-based T. Rowe Price, which recently opened a service center in Tampa.
"Every place we look, growth remains surprisingly strong," Smith said. "There will be more restrictive policies by central banks around the world to slow it down."
The Federal Reserve Board, like many of its counterparts in other countries, is determined to head off inflation before it has a chance to get rolling. That means pushing up interest rates to stem the flow of borrowed cash that fuels growth.
A growth rate of about 2.5 percent a year is considered sustainable, but above that, inflation becomes a threat. A report on third-quarter growth is due out Friday, and it is expected to be upbeat enough to make the Fed unhappy.
"What's happening now is that folks are waiting around for the Fed to raise interest rates yet again," said Marcos Jones, an economist with Raymond James & Associates Inc. in St. Petersburg.
The prevailing expectation is that a half percentage point increase in short-term rates will occur at a Fed meeting scheduled for Nov. 15. In fact, the move is so expected that it has been built into current bond market yields. However, the market is still anxious because no one knows whether that increase will be the last.
Jones said the Fed is under pressure to act because previous rate increases have not had enough impact, particularly in areas such as housing and car sales, which normally drop off when the rates for mortgages and car loans go up.
"Historically, higher interest rates have always slowed down the housing sector and for that not to happen means something peculiar is going on," Jones said.
Some people also say higher rates are needed to strengthen the dollar against foreign currencies, although so far they have not helped.
With all the uncertainty, investors are not rushing to lock in 8 percent yields for 20 or 30 years. As many learned this year, bond prices fall when rates rise and longer-term bonds fall the most.
"Clients have been shortening their portfolios," Jones said. "They've been hurt with bond funds as the market value of intermediate and long funds declined. People are heartened to see 4.5 percent and in some cases higher yields in money market funds. Right now the conviction is that we're in a rising rate environment and there is no payoff for going long."
Some economists think growth will slow in the current quarter, but others say that won't begin to happen until next year. In the meantime, there may be more upbeat economic statistics to make bond traders scowl.
"Every once in a while there's a little hint that the economy is slowing, but then we get another strong number," Smith said. "However, I think the worst is behind us."
Rising rates have hurt stocks, which fell again Monday. Although economic growth boosts corporate earnings, higher interest rates eventually could hurt as borrowing costs rise. In addition, higher yields make bonds relatively more attractive to investors.