The yield on the benchmark 10-year Treasury note hit the key psychological level of 3 percent Tuesday for the first time since January 2014.
Thomas Franck of CNBC.com had the story:
“It’s certainly a psychological level for people,” said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management. “We have a lot of supply this week, and that’s certainly putting pressure on the market … the quarterly refundings have been settings records.”
Pollack added that this week’s Treasury auctions of two-year, five-year and seven-year notes are likely to set a record in terms of size. Increased supply weighs on bond prices and yields move inversely to those prices.
Global investors have been fixated on the 10-year note yield in recent days as it climbed upward, concerned that the 3 percent level could trigger a reaction from financial markets around the world.
The yield, a barometer for mortgage rates and other financial instruments, has jumped in April on signs of nascent inflation and as the Federal Reserve stood by its plan to gradually tighten monetary policy. A move in the yield above 2.9 percent in February triggered a correction for U.S. stocks.
Liz McCormick and Brian Chappatta of Bloomberg News reported that the mark will spur calls for higher interest rates:
The yield, the benchmark for everything from U.S. mortgages to dollar bonds in developing nations, climbed as high as 3.0014 percent on Tuesday, before retreating to 2.99 percent as of 11:36 a.m. in New York. Traders have been focused on the next round number on the horizon for days, even though no clear catalyst emerged as the main culprit for the longest selloff in a year.
The move reinforces that yields are on the rise in the $14.9 trillion Treasuries market. They surged in the first two months of the year, but pared that advance last month, leading some strategists to ponder whether 2018 might echo 2017, when optimism on the economy led yields to peak early in the year. Fed officials’ most recent forecasts are for two additional rate increases in 2018. Traders are pricing in more than that.
“We are basically at our mid-year target right now,” said Jay Barry, a JPMorgan Chase & Co. fixed-income strategist. “This yield move is to be expected now given we are at a mature point in the cycle.”
Of course, just because the market hit a milestone doesn’t mean investors need to fret about runaway interest rates just yet. JPMorgan estimates the 10-year yield will end 2018 at 3.15 percent, the same as the median forecast of 56 analysts surveyed by Bloomberg. Indeed, the last time the 10-year yield topped 3 percent, toward the end of the bond-market wipeout known as the “taper tantrum,” Treasuries went on to rally anew.
Paul R. La Monica of CNNMoney.com reported that the rise means higher borrowing costs for consumers:
For Americans, that means borrowing costs are on the way up. For Wall Street, it’s a warning that higher interest rates may eat into corporate profits and that faster inflation is coming — both of which could eventually hurt the economy.
Investors also worry that the Republican tax cuts for businesses and individuals will cause the economy to grow too quickly.
The Federal Reserve is expected to raise short-term interest rates at least twice more this year and three times in 2019, in an effort to tap the economy’s brakes. That will probably lead to even higher rates on longer-term Treasuries.
In another potential warning sign in the bond market, short-term rates have also been rising. The difference in yields between short-term bonds and the 10-year note is narrowing, a phenomenon known as a flattening yield curve.
Why is this a problem? If short-term rates move higher than long-term rates, that creates something known as an inverted yield curve — and that has often happened just ahead of recessions.