The 10-year U.S. Treasury yield has broken through the “psychologically important” level of 3 percent, leaving analysts contemplating what it could mean the future of asset markets and, more importantly, the global economy.
The yield on the benchmark bond — which helps to set prices for debt instruments all over the world — inched past 3 percent Tuesday, a level that many market players deem dangerous for investments and the economy.
With yields rising — which move inversely to a bond’s price —market participants are expecting higher interest rates from central banks. And as a result of these higher interest rates, companies will have higher costs when borrowing money and will have less room to increase salaries, to invest, and to give returns to shareholders — making equities less attractive. As the 10-year note is used to set mortgage rates, then it can also reduce people’s ability to spend.
Billionaire bond investor Jeffrey Gundlach told CNBC Monday that if the 10-year yield were to rise above 3 percent, then traders would start betting that rates would go even higher. This would then continue fueling fears that a market crash and a potential crisis could be around the corner.
However, some others argue that the U.S. Federal Reserve still has lots of room to hike rates, without hurting markets, as they had been so low following the 2008 financial crash.
“Do 3 percent yields spell the end of the stock market? Will 3 percent yields trigger the global market reset and the end of times? Course not,” Bill Blain, head of capital markets at Mint Partners, said in a note Tuesday night.
“If the Fed hikes five or six times, rates will still be below long-term trend. But, the market’s talking-heads have got it into their heads that 3 percent 10-year yields are a gathering storm, a looming crisis and moment to despair. Let them worry,” he also said, noting that in the ten years prior to the crash, the average 10-year yield was 5 percent.
More importantly, rather than looking at the yield on the 10-year note, comparing it with shorter-term paper could be a better indicator.
The yield on the two-year Treasury note also hit a multiyear high on Tuesday, reaching 2.5 percent for the first time since September 2008.
The current difference between the short-term and longer-term yields means that investors see debt that is to be repaid in two years being nearly as risky as lending it for 10 years. And in a normal functioning economy lending in the short term has fewer risks — the underlying thought is that you can more easily predict what’s happening tomorrow rather next month.
Market players track that difference — in what they call the yield curve — to predict upcoming crises. The closer the short and the long term yields get, the higher the chances of an economic crash.
“A flattening yield curve is traditionally a harbinger of a recession to come, suggesting little inflationary expectations because of slowing economic activity. Why buy 10-year when you get nearly as much return from shorter dates,” Blain told CNBC via email.
There are differing expectations about the chances of a recession. Whereas the flattening of the yield curve is worrying for many analysts, others suggest it’s only a temporary situation.
Diana Amoa, fixed income portfolio manager at J.P. Morgan Asset Management, told CNBC’s “Street Signs” that there’s a “very low” probability of a recession this year.
“We think for now it’s technically driven, the yield curve, given just how much central banks have distorted the supply dynamics.”
Central banks tapped into bond markets in the wake of the global financial crisis in 2008 to boost their economies. But there’s a concern that their prolonged intervention has made investors accustomed to their support.