The 10-year Treasury yield, a vital benchmark that influences a vast array of consumer borrowing costs, traded above 4% for the first time in at least 12 years — the latest move in a rise that’s starting to ripple across financial markets.
soared to as high as 4.01% early Wednesday — more than twice as high as where it started the year — as financial-market participants come on board with the higher-for-longer view on interest rates, driven by central banks’ imperative need to bring down inflation. The yield, which moves opposite to price, subsequently pulled back after the Bank of England stepped in to buy U.K. government bonds, or gilts.
The 10-year rate hadn’t been 4% or higher on an intraday basis since April 5, 2010. The last time it finished the New York session at or above that level was in Oct. 15, 2008, according to Tradeweb data.
Typically, a rising 10-year yield is seen as a sentiment signal about brighter U.S. economic prospects. This time around, however, “it’s a wake-up call that inflation won’t be self-curing the way it has been in the last 30 years,” said Chris Low, chief economist at FHN Financial in New York.
The rate is up five of the past seven trading days and is on pace for its largest gain over the first three quarters of a calendar year since 1981. On Tuesday, it ended the New York trading session at a 12-year high of 3.963% — rising closer to the 4% level already reflected elsewhere in the Treasury market. Meanwhile, the 30-year Treasury yield
climbed to 3.829% — its highest level since Jan. 9, 2014.
Tuesday’s gains were the result of a continued U.S. government-bond selloff and came as the 30-year gilt
briefly climbed above 5%, putting yet another key level on the radar in global bond markets.
“The fact that we’ve seen no relief for days and that it’s been a one-way trade for days suggests a little more panic and little less logic in traders’ thinking,” FHN’s Low said via phone on Tuesday. “It’s an indication that they realize they were slow to react, that they missed something. The Fed is always at least a little bit behind the curve, but traders are supposed to figure things out in real time. It’s taken quite a while to wrap their heads around the idea of stubbornly high inflation.”
The steep climb in Treasury rates is being seen as one of the factors behind Tuesday’s turnaround in stocks, which also got hit by the strong 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
initially opened higher as buyers searched for opportunities to come back in. But the early bounce faded into the afternoon as investors pushed yields on 7- through 30-year U.S. government debt either closer to or further above 4%. The Dow Jones Industrial Average
and the S&P 500
finished lower for a sixth straight day on recession jitters, while the Nasdaq Composite
eked out a slight gain.
U.S. stock-index futures pointed to a lower start Wednesday morning.
The 10-year yield’s drive toward 4% “definitely” put a dent in stocks on Tuesday, said Daniel Tenengauzer, head of markets strategy for BNY Mellon in New York.
“Bond yields gravitating toward or above 4% means markets are pricing in tighter policies for longer,” he said via phone. “In my opinion, it’s the realization that bond yields are highly unlikely to revert to a lower range in the medium to longer term, given higher inflation and tighter policy for longer, that’s having an impact.”
Each leg higher in market rates brings a new level of nervousness in equities, where expectations on future earnings are dented by rising financing costs for businesses. Rising yields also raise the opportunity cost of investing in equities versus safe assets like Treasurys, providing another headwind for equities and other assets viewed as risky.
In the U.S. economy, some of the first places that a 4% 10-year Treasury rate will hit is mortgages and loans on everything from automobiles to credit cards and student debt — “ultimately, anything bought on credit,” according to Low at FHN. Indeed, the rate on a 15-year fixed mortgage went further above 6% on Tuesday, while a 30-year fixed mortgage shot above 7%, according to Mortgage Daily News.
“Wall Street is finally seeing the Fed’s rate-hiking cycle turn restrictive as the 10-year yields approaches 4%, and the prospect of more rate hikes is on the table given the strong data we’ve seen today,” said Edward Moya, senior market analyst for the Americas at Oanda. “You are going to see much more significant deterioration in economic readings in the months to come. Meanwhile, everything has just gotten much more expensive for the average consumer.”