Rising Treasury Yields To Hit The Stock Market

Virginia Carson
April 26, 2018

The yield on U.S. 10-year Treasury notes rose above 3 percent as investors reduced their United States bond holdings on worries about rising inflation and growing government debt supply.

It has benefited in recent weeks from concerns over the US-China trade dispute, sanctions on Russian Federation and unrest in the Middle East, but has been kept in check by the prospect of further interest rate hikes from the Federal Reserve.

"The low-interest-rate environment in the rest of the world is likely to slow any rise in U".

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Gold prices fell on Wednesday as the dollar advanced towards more than three-month highs and on easing concerns over North Korea and a Sino-US trade war, but found some support from sliding stock markets. Stocks are no longer the only game in town.

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Turning to recent news and events, 10-year US Treasury bonds are now yielding 3.003%. For comparison purposes, Canada's 10-year government bond was yielding just over 2.3 per cent on Tuesday morning. The Dow Jones industrial average fell less than 0.1 percent to 24,448.69.

"It's a big level in the global marketplace, it's a big psychological level", said Justin Lederer, interest rate strategist with Cantor Fitzgerald in NY.

Besides that, financial markets will take into account where the core US inflation rate is headed for.

Ten year treasury yield close to exceeding 3%, a yield that it hasn't reached in more than four years.

"At least in the currency world, rising yields in the US severely undermine the appeal of riskier assets, particularly higher-yielding and emerging market currencies", said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

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After selling $32 billion worth of 2-year notes yesterday, the Treasury Department plans on auctioning $35 billion of 5-year bonds today and $29 billion of 7-year bonds tomorrow.

Debt in New York Stock Exchange margin accounts is the highest on record, yet the measure necessarily rises when the value of stocks-which are used as underlying collateral-rises. The stock plunged 8.3 percent to $192.27. Treasury notes have to beat inflation, as a result; that is, if you spend that $950 in 2006, from our example above, it needs to have a return better than inflation, which in this case would be $1135 in 2016.

The dollar took a breather on Monday after its recent march higher as USA yields retreated, while European stocks rose another 0.2 percent. The biggest economic action out of Washington might be the Fed raising interest rates - a clear negative for investors. Pension funds tend to hold a lot of bonds.

In my recent blog Investors Must Watch Bond Market for Signs of Economic Strain: "Investors could do well watching the bond market as the idea of tax cuts and more spending in an economy that has full employment and a large budget deficit is an interesting challenge to the conventional economic thinking".

"It's a round number and one we haven't touched too frequently, so it's going to get some attention", said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

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In an earlier post, I have suggested another reason for this rise.

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