Most investors have heard by now that yields on government bonds are soaring. It's been on the front page of every newspaper.
Yields are rising as bond investors around the world are selling many of their longer-maturity bonds -- like those maturing in five, 10, and 30 years -- amid worries about rising U.S. government debt and inflation. When they sell those bonds, their prices fall and their yields, which move in the opposite direction of price, rise.
That might seem to many stock investors like a bond market problem -- and thus nothing to really worry about. But in fact, rising yields have a huge impact on the stock market in multiple ways.
One particular impact of rising yields is on homebuilder and automaker stocks. Because auto and home loans are based on bond yields, higher yields make home and auto purchases more expensive to finance.
Image source: Getty Images.
The average car loan length is about six years -- 5.8 years for new cars and 5.6 years for used cars. So, lenders use the five-year Treasury yield as their base index cost. And that yield has risen this year to 4.55%, up from 3.73% as of Jan. 1. As a result, the average rate on a 60-month car loan is now around 7%, though it was as high as 9.45% in April.
As a result, buying a car is now more expensive. Investors know this, and that's part of the reason automaker stocks are down all of a sudden. General Motors (GM +0.25%) shares have fallen 5% over the past month, while Ford Motor Company (F +0.90%) shares have dropped 5.8%.
NYSE: F
Key Data Points
Rising yields only add to the housing sector's pain
It's a similar story with mortgage rates. A typical mortgage is 30 years, but the rate on those loans rises and falls with the 10-year Treasury yield because many homeowners refinance their loans long before 30 years. That yield is soaring, hitting 4.8% this week, from about 4.1% at the beginning of the year.
As a result, the average 30-year mortgage rate now stands at 6.7%, according to Freddie Mac, double what it was five years ago. That higher rate has two big negative impacts on the housing market: It makes buying a house much more expensive, putting a home purchase out of reach for many Americans. It also discourages longtime homeowners like me, who enjoy mortgages with rates near 3%, from selling, because they don't want to take on a new home loan at twice the interest rate.
That's partially why homebuilder stocks are suffering. Lennar (LEN -0.60%) is down almost 19% this year, though it rebounded a bit in recent weeks. PulteGroup (PHM +0.39%) is up 5.6% for the year but has fallen more than 2% over the past month. And D.R. Horton (DHI -0.84%) has fallen 1.2% this year and about 0.5% over the past month.
Of course, the housing industry has been suffering for a while, as rising home prices -- due to a national shortage of some 5 million homes -- sent the median sales price of a new home above $440,000 in June. That puts a home purchase well out of the reach of many Americans. And rising mortgage rates only aggravate that unaffordability.
NYSE: LEN
Key Data Points
Yields look to remain elevated for the foreseeable future
The question for these companies and their shareholders, then, is, when will yields -- and the borrowing rates based on them -- come back down?
That's hard to say. Headline inflation of 3.7% remains well above the Federal Reserve's 2% target. And U.S. government debt, which just hit a whopping $40 trillion, looks to only accelerate, with lawmakers in Washington proving unable to bring it down right now. Finally, the massive bond issuance by hyperscalers to fund their AI data centers -- hundreds of billions of dollars -- is competing with Treasury bonds for buyers. That also pushes Treasury yields higher, and it only looks to continue.
Bottom line: Automakers and homebuilder stocks have a new headwind that doesn't look to die down anytime soon.
