Analysis-Falling Treasury yields could turn Fed hawkish if financial conditions ease By Reuters

By David Randall

NEW YORK (Reuters) – Falling Treasury yields helped launch an explosive rebound in stocks and lifted U.S. government bonds from 16-year lows. Now some investors worry that further declines in yields could keep the Federal Reserve in a hawkish stance for longer, potentially hurting asset prices over the longer term.

The paradox highlights how the relationship between yields and financial conditions – factors that reflect the availability of funding in an economy and are watched closely by central bankers – has come into focus in recent months.

Surging Treasury yields sapped investors’ risk appetite and weighed on stocks over the last few months by helping tighten financial conditions as they raised the cost of borrowing for companies and households.

That relationship has reversed in recent weeks. U.S. 10-year yields – which move inversely to bond prices – have fallen nearly 50 basis points from their highs, while the has rebounded about 6.5% in that period. But some investors believe financial conditions…