Markets in a Minute
How Rising Treasury Yields Impact Your Portfolio
This infographic is available as a poster.
This infographic is available as a poster.
How Rising Treasury Yields Impact Your Portfolio
Since the start of 2021, the yield on the U.S. 10-year Treasury note has climbed to pre-pandemic levels. But what exactly does this mean, and how could it impact your portfolio?
In this Markets in a Minute from New York Life Investments, we explain why Treasury yields are important and which investments may go up or down when yields are rising.
What are Treasury Yields?
Treasury yields are the total amount of money you earn from U.S. debt securities, such as bonds and T-bills. Yields depend on both the security’s price, relative to its face value, and its “coupon” or interest payment.
The 10-year yield is important because it is closely-watched indication of market sentiment. Here’s what leads to changing Treasury yields:
- When investors expect the market to drop, they look for safer investments.
- Due to higher bond demand, prices rise.
- This lowers their yield, as bonds become more expensive than they were before.
The opposite occurs when the market is bullish.
- When investors expect the market to rise, they look for riskier investments.
- Due to less bond demand, prices drop.
- This raises their yield, as bonds become more cost effective.
Currently, Treasury yields are in the latter scenario because investors are confident in a sustained recovery as vaccines are rolled out and the economy reopens.
Investments That May Go Up During Rising Yields
Rising yields can have a number of knock-on effects in the market. Here are the investments that could increase in value when yields are going up.
| Investment | Why could returns potentially increase? |
|---|---|
| U.S. dollar | Rising yields attract income-seeking investors, who must purchase U.S. debt in U.S. dollars |
| Savings accounts | If the economy is growing at a rate that may lead to hyperinflation, the central bank may raise interest rates |
| REITs | While rising rates pose challenges, economic growth typically translates into a higher level of real estate demand |
| Cyclical stocks | Stocks that move with the economy, like banks, tend to do well during economic recoveries |
Cyclical stocks, such as banks, travel, and energy, may all benefit from an economic recovery. This is particularly true for banks if the economy is growing at a rate that exceeds inflation targets, as the central bank may raise interest rates. In turn, this allows banks to earn a higher profit margin because they can charge a higher rate on their loans.
While it is commonly said that real estate investment trusts (REITs) underperform during rising interest rates, the data tells a different story. In four of six periods of sustained rising yields, REITs earned positive returns—and they outperformed stocks in half of them.
Source: S&P Dow Jones Indices
Rising rates do pose challenges, including higher borrowing costs and lower property values.
However, it’s evident that rising rates also have a positive influence on REITs. For instance, rising rates are typically associated with economic growth, which translates to higher real estate demand and higher occupancy rates. This means REITs can see increased earnings and dividends.
Investments That May Go Down During Rising Yields
On the flip side, there are some investments that could decrease in value when yields climb.
| Investment | Why could returns potentially decrease? |
|---|---|
| Bonds | To remain competitive, newly issued bonds offer higher interest rates—making existing bonds less attractive |
| Dividend-paying stocks | Rising rates give an edge to newly issued bonds, creating a historically safer alternative for income-seeking investors |
| Gold | As a safe haven asset, gold is less desirable during market optimism |
| Some growth stocks | Rising interest rates make borrowing more expensive, which may slow company growth |
Existing bonds will likely see declining performance, with higher volatility among long-term government and corporate bonds. Short-term bonds typically see smaller drops. This is because they have less interest rate risk: there’s a smaller probability that interest rates will rise before a short-term bond’s maturity, and they have fewer interest payments that could be affected by rising rates.
Growth stocks, such as those in the technology sector, may also see weaker performance. In fact, value stocks have been outperforming growth stocks since the fourth quarter of 2020, a significant shift from growth’s strong historical performance in recent years.
U.S. Treasury Yields: One Part of the Picture
In addition to being a barometer for investor confidence, Treasury yields can have an important impact on your portfolio.
However, investment performance can vary depending on a number of other economic factors such as inflation and interest rate levels. For example, climbing inflation could lead to higher gold prices, since gold is seen as an inflationary hedge. You may want to consider the full economic picture when you are reviewing your portfolio.
Markets in a Minute
Data Centers: Investing in the Infrastructure of the Future
Infrastructure refers to any asset that provides an essential service. In today’s interconnected world, data centers are exactly that.
This infographic is available as a poster.
Data Centers: Investing in the Infrastructure of the Future
Digital transformation is one of the world’s most prominent trends today.
For evidence, consider the growth in internet users worldwide. By 2023, 5.3 billion people (66% of population) will be using the internet, up from 3.9 billion (51% of population) in 2018.
This growth has resulted in an incredible amount of data being produced each day, whether its from streaming music on Spotify or buying goods on Amazon. But how is all this data being processed?
In this Markets in a Minute chart from New York Life Investments, we shed light on the importance of data centers, and why they should be considered as core infrastructure.
The Role of the Data Center
A data center is a facility that stores, processes, and disseminates data. There are thousands of them around the world, and collectively, they’re referred to as the “cloud”.
This puts data centers at the center of nearly everything we do online: e-commerce, communications, storage and back-up, and even online gaming. To gain a better sense of what this all looks like, the following table breaks down the storage capacity of the world’s data centers.
| Segment | 2016 Storage Capacity (exabytes) | 2021 Storage Capacity (exabytes) |
|---|---|---|
| Compute | 160 | 470 |
| Collaboration | 170 | 400 |
| Database & analytics | 150 | 380 |
| Enterprise resource planning | 180 | 420 |
| Video streaming | 50 | 180 |
| Social networking | 60 | 160 |
| Search engine | 30 | 100 |
| Other consumer apps | 70 | 190 |
| Total | 870 | 2,300 |
Source: Statista (2021)
One exabyte is equal to one billion gigabytes, which means the world currently has 2.3 trillion gigabytes of total storage.
The largest segment is compute instances, which are cloud-based workstations used by data scientists. At the lower end of the scale are segments like video streaming (includes Netflix and Hulu) and social networking (think Facebook or LinkedIn).
Cloud Spending Reaches a Historic Milestone
For businesses that create and use data, moving to the cloud (as opposed to maintaining their own servers) has plenty of advantages like cost savings, flexibility, and security.
This is driving exponential growth in cloud infrastructure spending, which reached a record $130 billion in 2020. At the same time, spending on data center hardware decreased from $96 to $90 billion. These results are partly attributed to COVID-19, which forced many businesses to switch to a work-from-home operating model.
A survey conducted by 451 Research found that 40% of businesses had increased their usage of cloud services during the pandemic. In addition, 85% of those who were impacted indicated that the move would be a permanent one.
Data Centers are Infrastrcture
The scope of an infrastructure investor has historically been limited to companies in construction, energy, and transportation.
But what defines infrastructure?
It’s any physical system that is vital for an economy’s development and prosperity—and in a world where over 5 billion people are expected to be online by 2023, the data center is the perfect embodiment of that.
Markets in a Minute
Sustainable Investing Assets Worldwide (2018-2020)
From 2018-2020, global sustainable investing assets grew by 15% to reach $35.3 trillion. Here’s how they break down across five major markets.
This infographic is available as a poster.
Sustainable Investing Assets Worldwide (2018-2020)
Sustainable investing is top-of-mind for many investors, but how fast is it actually growing?
Between 2018 and 2020, global sustainable investing assets grew 15% to reach $35.3 trillion. This works out to more than a third of total assets under management.
In this Markets in a Minute from New York Life Investments, we explore the value and growth of sustainable investing assets across five major markets.
What is Sustainable Investing?
Sustainable investing considers environmental, social, and governance (ESG) factors in portfolio selection and management. For the purposes of this data, it is a broad definition that includes seven main approaches:
- ESG integration
- Corporate engagement & shareholder action
- Norms-based screening
- Negative/exclusionary screening
- Best-in-class/positive screening
- Sustainability themed/thematic investing
- Impact and community investing
In most regions, it is becoming increasingly common to combine several of the above strategies within the same product.
Sustainable Investing Assets by Region
Sustainable investment data comes from five major markets: the U.S., Europe, Japan, Canada, and Australasia. Currencies have been converted to U.S. dollars at the prevailing exchange rate at the day of reporting. We’ve based growth rates on U.S. dollar values.
Here is the value of sustainable investing assets in U.S dollars, sorted by asset amounts in 2020.
| Region | 2018 | 2020 | Growth Rate |
|---|---|---|---|
| United States | $12.0T | $17.1T | 42% |
| Europe | $14.1T | $12.0T | -15% |
| Japan | $2.2T | $2.9T | 32% |
| Canada | $1.7T | $2.4T | 43% |
| Australasia | $734B | $906B | 23% |
All 2020 assets are reported as of December 31, 2019 except for Japan which reports as of March 31, 2020. Australasia is Australia and New Zealand. In 2020, Europe includes: Austria, Belgium, Bulgaria, Denmark, France, Germany, Greece, Italy, Spain, Netherlands, Poland, Portugal, Slovenia, Sweden, the UK, Norway, Switzerland, and Liechtenstein.
The U.S. makes up almost half of global sustainable investment assets, and saw the second highest growth rate. One strong theme in the country is racial justice investing. Over 120 investors and organizations signed a call to action for the investment community to dismantle systemic racism and promote racial equity and justice. They plan to achieve this through various actions, such as hiring people of color and financing Black entrepreneurs.
Europe makes up over a third of all sustainable investing assets. The region has seen important regulatory developments, such as:
- Institutional investors, asset managers, and advisors must report on how they integrate sustainability risks and adverse impacts at the entity level
- Advisors are required to ask about their clients’ ESG preferences and advise appropriate products
While Europe saw a decline in growth from 2018-2020, this is because the region has changed how they define sustainable investing. Tighter legislation means that some products that previously qualified as sustainable may not meet the new requirements. The goal of the legislation is to create clear standards for sustainable products, promoting trust and easier access for investors.
The Mounting Pressure
Globally, the proportion of sustainable investing assets is growing. In fact, sustainable investments make up 36% of global assets under management, up from 28% in 2016.
Investment professionals say the top drivers of sustainable investing are to help manage investment risks, and because clients demand it. Not only that, the recent Intergovernmental Panel on Climate Change (IPCC) report has reinforced the importance of sustainable investments.
“The climate crisis poses enormous financial risk to investment managers, asset owners and businesses….. The public and private sector must work together to ensure a just and rapid transformation to a net-zero global economy.”
—António Guterres, UN Secretary-General
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