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The yield on 10-year Treasury bonds is hovering below the levels that caused a massive collapse last fall.
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However, persistent inflation and weak Treasury auctions could boost yields beyond the 5% level.
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Once this threshold is crossed, investors may experience a sharp correction in stocks.
Treasuries may not be the most exciting trade, but rising yields not far from current levels could eventually make things boring.
While stock momentum this year has kept Wall Street distracted, the benchmark 10-year interest rate has risen as much as 83 basis points since 2023.
This took it to 4.7% in April, not far from the threshold level that broke through the markets last fall: 5%. When the 16-year high was breached in October, it triggered one of the most historic events The worst market crashes. While Treasuries fell on Friday after the modest jobs report, markets are still cautiously eyeing further upward moves amid sticky inflation and broad economic strength.
Can 5% returns be restarted? For analysts, it all depends on fiscal policy and inflation.
Where are the returns going?
“Bond King” Bill Gross is among those touting caution, telling investors that higher Fed borrowing will push yields to 5% levels within… The next 12 months.
Yields move inversely with bond prices, meaning lackluster demand leads to higher interest rates. That's why Treasury auctions have become the focus of markets, as investors watch to see if there are enough willing buyers.
Ed Yardeni, a market veteran, told Business Insider that it was the “dirty” auctions that caused bonds to tumble last fall. Many buyers have been turned off America's exploding debtWith little effort to clamp down on it, he said, there could be more disappointing auctions.
Both the Treasury and the Federal Reserve made liquidity adjustments this week to ease pressure on buyers, but we will have to see if these efforts are enough.
If 5% is breached for this reason, Yardeni's research head said it could go differently: “This time, you know, we might find that 5% is left and then we'll all be wondering whether the next step is towards six, or back To four.”
Investment firm SEI had similar concerns in April, adding that stubborn inflation data this year would only exacerbate the problem in the near term. With consumer prices remaining high, interest rates have remained steady, halting the rush to buy fixed income instruments:
“We would not be surprised to see the 10-year Treasury yield retest the 5% level even with the possibility of a rate cut on the horizon,” he wrote in a statement. NB.
But for Eric Sterner, of Apollon Wealth Management, more pessimism would have to hit markets to justify exceeding 5%. This would only be a concern if inflation prompted the Fed to raise interest rates, but that is not the case Doesn't seem likely.
However, yields will not fall anytime soon while inflation remains steady, BI said:
“If we can achieve this rate cut, we will probably be able to get closer to the 4% level,” he said. “But I don’t think we got below 4%.”
Risk 5%
When 10-year bond yields broke the 5% mark last fall, traders panicked and caused… Standard & Poor's 500 It fell nearly 6% from peak to trough in October.
Some of that is due to how quickly yields rose, which didn't happen this time, Yardeni said.
“It was a more discreet movement, happened at a slower pace, and didn't catch anyone's attention in the stock market,” he said. “Even growth stocks did well, although they're not supposed to do well when bond yields are rising.”
But exceeding 5% may change that. According to a Goldman Sachs note, rises exceeding 5% have historically sparked negativity for stocks. In 1994, even strong earnings had difficulty pushing stocks higher for higher returns.
Even Sterner agreed it was a risk, if only in the short term: “Theoretically, if we go above 5%, I think it could lead to a market correction or a sell-off of 10% or more.”
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