20 April 2024

10-Year Treasury Yield Tops 3% 

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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.

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 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.

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 quarters.

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 Tuesday.

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 years."

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 metropolitan areas.

Click here for the original article from CNBC.

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