Why a rising 10-year Treasury yield is rattling 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 starting to spread across financial markets.

It rose to 3.988% on Tuesday – more than double what it was at the start of the year – as financial market participants joined in a higher view of interest rates, spurred by the urgent need for central banks to bring down inflation. The 10-year average hasn’t been 4% or higher on a daily basis since April 5, 2010. The last time it ended the New York session at that level or higher was on October 15, 2008, according to Tradeweb data.

Read:Financial markets including precious metals continue to recalibrate

A rise in 10-year bond yields is usually seen as a signal of sentiment about the brighter US economic outlook. “It’s a wake-up call that inflation is not going to heal itself the way it has in the past 30 years,” said Chris Low, chief economist at FHN Financial in New York, this time.

The price has risen in five of the past seven trading days and is on track for its biggest gain in the first three quarters of a calendar year since 1981. On Tuesday, it finished the New York trading session at a 12-year high of 3.963% – the rally closer to the 4% level already reflected elsewhere in the Treasury market. Meanwhile, the 30-year Treasury yield TMUBMUSD30Y,
It rose 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 with the 30-year gold bond TMBMKGB-30Y,
– or its UK counterpart – briefly climbed above 5%, putting another key level on the radar in global bond markets.

Read:Liz Truss favours trickle down economics but results can be trickle up | Economics

“The fact that we haven’t seen any relief for days and one-way trading for days suggests more panic and less logic in the minds of traders,” FHN’s Low said by phone on Tuesday. “It is an indication that they realize they have been slow to respond, that they missed something. The Fed is always at least a little behind the curve, but traders are supposed to figure things out in real time. It took a while to wrap their heads around the idea of stubbornly high inflation.”

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

All three major indexes SPX,


+ 0.25%
It initially opened high as buyers were looking for opportunities to return to. But the early bounce faded in the afternoon as investors pushed 7-year to 30-year US government bond yields either near or above 4%. Dow Jones Industrial Average DJIA,
and the S&P 500 SPX,
closed lower for the sixth day in a row due to recession tension, while the Nasdaq Composite Index,
+ 0.25%
He got minor gains.

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Daniel Teningauzer, head of markets strategy at BNY Mellon Bank in New York, said the 10-year yield trend toward 4% “certainly” sent stocks lower on Tuesday.

“Bond yields are gravitating towards 4% or more which means markets are pricing in stricter policies for a longer period,” he said by phone. “In my view, the realization that bond yields are unlikely to return to a lower range in the medium to long term, given higher inflation and tighter policy for longer, this has an impact.”

Each move higher in market rates brings a new level of tension in stocks, as expectations about future earnings are affected by rising corporate financing costs. Higher returns also increase the opportunity cost of investing in stocks versus safe assets such as Treasurys, providing other headwinds for stocks and other assets viewed as risky.

We see: Why 2-year Treasury yields are the “core problem” for a struggling stock market, according to this Morgan Stanley portfolio manager.

In the US economy, among the first places the 4% 10-year Treasury rate will be affected are mortgages and loans on everything from cars to credit cards and student debt — “ultimately anything bought on credit,” according to Low at FHN . In fact, the 15-year fixed-rate mortgage rose to more than 6% on Tuesday, while the 30-year fixed-rate mortgage was above 7%, according to Mortgage Daily News.

Read: Housing market shares give up gains as another jump in bond yields shines bright data

“Wall Street is finally seeing the Fed rate hike cycle become capped as 10-year yields approach 4%, and the possibility of a rate hike is on the table given the strong data we saw today,” said Edward Moya. Senior Market Analyst for the Americas at Oanda. You will see a much larger deterioration in the economic readings in the coming months. In the meantime, everything is becoming more and more expensive for the average consumer. ”

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