Published: February 28, 2023 at 3:00 PM ET
The benchmark 10-year government bond yield briefly approached 4% on Tuesday, a milestone it has not sustained for more than a decade. Loans rose as high as 3.976% after inflation updates from France, Spain and the United Kingdom all indicated that there were no signs of abating in gains. Last September, when the 10-year Treasury yield briefly touched above 4% for the first time in at least 12 years, the Dow Industrials fell to its lowest level of 2022 within days, followed by the S&P 500 a few weeks later. The rate…
The benchmark 10-year Treasury yield briefly approached 4% on Tuesday, a milestone it has not sustained in more than a decade.
The 10 year rate
TMUBMUSD10Y
,
which influences everything from mortgages to student and car loans rose as high as 3.976% after inflation updates from France, Spain and the UK showed no signs of abating in gains. Last September, when the 10-year Treasury yield briefly touched above 4% for the first time in at least 12 years, the Dow Industrials fell to its lowest level of 2022 within days, followed by the S&P 500 a few weeks later. The rate stayed above 4% in October and November and then fell again as traders and investors grew optimistic that inflation could still ease significantly.
Now, after a torrent of data to the contrary, financial markets are increasingly coming to the view that interest rates are higher for longer, particularly in the US, where the economy has proved stronger than expected after nearly a full year of interest rate hikes. Expectations readjustment sent the 6-month T-bill rate
TMUBMUSD06M
up 5.13% on Tuesday and towards the highest level in 16 years.
Shifting interest rate expectations and rising bond yields were partially blamed for a February pullback that hurt a stock market rally in early 2023. The S&P 500
SPX
was on track for a 2.1% monthly decline and trimmed its year-to-date gain to around 3.8%, according to data from FactSet.
“Last time we were at 4% in October and November, markets were worried about inflation and the Fed was fighting it. Since then, risks to the economy have only increased as inflation persists, suggesting policymakers have not acted quickly enough,” said David Gagnon, managing director and head of U.S. Treasury trading at Academy Securities in San Diego , California.
Read: What’s next for the stock market as investors brace for a prolonged battle against inflation?
“Adding to the difficulty is the fact that the economy has undergone two years of restructuring, probably the greatest since World War II,” as millions of Americans pulled out of the workforce and the Fed must now work hard to cut jobs he said by phone said. If policymakers succeed, it would put the housing market at greater risk as people are forced to sell and “at the same time, higher interest rates have limited the number of buyers”.
Archive: Why a rising 10-year Treasury yield would shake financial markets as it is briefly above 4%
In fact, the Dallas Federal Reserve Bank, one of the 12 regional banks in the Federal Reserve System, warned on Tuesday of the risk of a global housing slide amid rising interest rates.
Meanwhile, economists at a major Wall Street firm, JPMorgan Chase & Co., said the risk of an “angry Old Testament” response from central banks is growing. And strategist Dominique Dwor-Frecaut, a former New York Fed staffer, has warned that policymakers will need to redouble their rate-hike efforts to stabilize inflation.
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