The yield on the benchmark 10-year Treasury note hit
the key psychological level of 3 percent Tuesday for the first time since
The yield on the two-year Treasury note also set a multiyear record
Tuesday, topping 2.5 percent for the first time since September 2008.
The yield inched past 3 percent shortly after the open of stock trading
on Tuesday before pulling back slightly.
"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
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.
Billionaire bond investor Jeffrey Gundlach told CNBC on Monday that if the 10-year yield does crack the 3
percent ceiling, traders may then get the confidence to bid rates even higher.
"I've been of the opinion that closing above 3 [percent] would lead
to an acceleration to higher yields," said Gundlach.
The rise in rates throughout 2018 has become a divisive issue on Wall
Street. Some see higher rates as a vote of confidence on the strength of the
economy, with the government set to report on first-quarter GDP this Friday.
The economy grew at a pace of around 3 percent annualized the previous two
However, others consider increased borrowing costs a threat to the bull
market that began amid — and was fueled by — historically low rates and
extraordinary Fed stimulus.
The central bank has started to unwind its massive balance sheet and
gradually hike rates, a move traders have blamed for a sharp rise in short-term
rates and a resulting flattening in the yield curve.
The Treasury Department will auction $32 billion in two-year notes on
Cheap corporate borrowing has allowed companies not only to borrow cash
easily, but also buy back their own stock. Many of Wall Street's largest
technology and internet companies — responsible for much of the historic run in
equities — have taken advantage of the low rates. Netflix, renowned for its big
spending and negative free cash flow, said it plans to raise $1.5 billion in
the corporate bond market on Monday.
Investors have also been selling Treasurys as of late — leading to
rising yields— amid expectations of rising inflation, which may encourage the U.S.
central bank to tighten monetary policy more quickly.
"I would argue it's more of a demand-driven move," said Jim
Bianco, head of the Chicago-based advisory firm Bianco Research. "People
are concerned that inflation is going to stay sticky, and reiterating the idea
that the Federal Reserve will raise rates six times over the next two
Earlier in April, the Fed released the minutes from its March meeting
stating that "all participants" expected a strengthening economy and
rising inflation in coming months, suggesting that the central bank would stick
with its plan to gradually hike rates.
The pivot in Fed policy toward more stringent lending, Bianco said, has
also buoyed the two-year yield higher at an even faster pace, shrinking the
spread between the two rates to 0.5 percentage point, down from 1.25 percentage
points at the end of 2016.
"If Fed members do plan on raising rates six times, the thing that
saves us from a recession is inflation," Bianco added. "If you get
more inflation, the back end goes up and the market's OK. But we're really
worried the Fed will make a mistake."
Yields likely drew support from strong consumer confidence and home
pricing data released on Tuesday. An index of U.S. consumer attitudes increased
to 128.7 this month, up from a print of 127 in March, notching its highest read
since February's multiyear record, according to the Conference Board.
Housing prices, meanwhile, jumped 6.3 percent in February compared to a
year ago, according to the S&P CoreLogic Case-Shiller Home Price Index. A
chronic shortage of homes is blamed for the rising home prices, especially in
Click here for the original article from CNBC.