Why a rising 10-year Treasury yield is rocking financial markets as it nears 4%

The 10-year Treasury yield, a vital benchmark that influences a wide range of consumer borrowing costs, is on track to hit 4% for the first time in at least 12 years – a development that is beginning to reverberate. in the financial markets.

The rate TMUBMUSD10Y,
3.999%
climbed as high as 3.988% on Tuesday – more than twice as much as at the start of the year – as financial market participants rallied to the view of higher interest rates for longer, driven by the central banks’ imperative need to bring down inflation. The 10-year rate has not been 4% or higher on an intraday basis since April 5, 2010. The last time it ended the New York session at this level or above was the October 15, 2008, according to Tradeweb data.

Generally, a rising 10-year yield is seen as a sentiment signal regarding a brighter US economic outlook. This time around, however, “it’s a wake-up call that inflation won’t heal itself the way it has for the past 30 years,” Chris Low, chief economist at FHN Financial, told Reuters. New York.

The rate has risen on five of the last seven trading days and is on course for its biggest gain in the first three quarters of a calendar year since 1981. On Tuesday, it closed the New York trading session at a 12-year high of 3.963% – approaching the 4% level already reflected elsewhere in the Treasury market. Meanwhile, the 30-year Treasury yield TMUBMUSD30Y,
3.888%
climbed to 3.829% – its highest level since January 9, 2014.

Tuesday’s gains were the result of continued selling of US government bonds and came as the 30-year gilt TMBMKGB-30Y,
5.092%
– or the UK counterpart to Treasuries – briefly spiked above 5%, placing yet another key level on the radar of global bond markets.

“The fact that we haven’t seen any relief for days and this has been a one way trade for days suggests a bit more panic and a bit less logic in traders’ thinking,” FHN’s Low said by phone Tuesday. “It’s an indication that they realize that they were slow to react, that they missed something. The Fed is still at least a little behind the curve, but traders are expected to figure things out in real time. It took them a while to get the idea of ​​stubbornly high inflation.

The sharp rise in Treasury rates is seen as one of the factors behind Tuesday’s rally in equities, which was also hit by dollar strength and a batch of stronger-than-expected economic data that bolstered sentiment. dynamic “good news is bad news”. in shares.

The three main SPX indices,
-0.21%

DJIA,
-0.43%

COMP,
+0.25%
initially opened higher as buyers looked for opportunities to return. But the early rebound faded in the afternoon as investors pushed US 7-30 year government debt yields either closer to or above 4%. The Dow Jones Industrial Average DJIA,
-0.43%
and the S&P 500 SPX,
-0.21%
finished lower for a sixth straight day on recession jitters, while the Nasdaq Composite COMP,
+0.25%
made a slight gain.

The 10-year yield’s push toward 4% “definitely” weighed on stocks on Tuesday, said Daniel Tenengauzer, head of market strategy for BNY Mellon in New York.

“Bond yields hovering around or above 4% mean markets are pricing in tighter policies for longer,” he said by phone. “In my view, it is the realization that bond yields are very unlikely to return to a lower range in the medium to long term, given higher inflation and tighter policy for longer, which has an impact.”

Each step of market rate hikes brings a new level of jitters to equities, where expectations of future earnings are shaken by rising corporate funding costs. Rising yields also increase the opportunity cost of investing in stocks relative to safe assets like Treasuries, creating another headwind for stocks and other assets considered risky.

See: Why 2-Year Treasury Yields Are “The Core Problem” In The Troubled Stock Market, According To This Morgan Stanley Portfolio Manager

In the U.S. economy, some of the first places a 4% 10-year Treasury rate will hit are mortgages and loans on everything from automobiles to credit cards and student debt — “ultimately, everything what is bought on credit,” according to Low at FHN. Indeed, the rate on a 15-year fixed mortgage rose above 6% on Tuesday, while a 30-year fixed mortgage rose above 7%, according to Mortgage Daily News.

Lily: Housing market stocks give up gains as another jump in bond yields wipes out strong data

“Wall Street is finally seeing the Fed’s rate hike cycle turn restrictive as 10-year yields approach 4%, and the prospect of further rate hikes is on the table given the strong data we’ve seen today. today,” said Edward Moya, senior market analyst for the Americas at Oanda. “You are going to see a much larger deterioration in economic readings in the months ahead. Meanwhile, everything has become much more expensive for the average consumer.