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First time in 11 years! What does the 10-year U.S. Treasury yield above 3.5% mean?

The yield on the benchmark 10-year U.S. Treasury note rose above the 3.5% mark for the first time since 2011 on Monday (September 19), marking a new milestone in the year’s surge in global bond yields, as markets are expected to vow to curb high bond yields. The inflationary Federal Reserve is expected to raise interest rates by 75 basis points for the third time in a row this week.

According to market data, the 10-year U.S. bond yield hit 3.516% overnight, breaking through a key psychological line of defense in the bond market since mid-June, and has since fallen back slightly, trading around 3.495% in late trading. Up about 3.9 basis points.

Of course, the main selling pressure in the U.S. bond market overnight was still concentrated on the two-year Treasury bonds, which are most sensitive to changes in the Fed’s interest rate. new high since. Once the 2-year U.S. bond yield further rises above the key psychological threshold of 4% in the market outlook, it is likely to be another sensational moment in the U.S. bond market.

Yields on other maturities also rose broadly on Monday. The 3-year U.S. Treasury yield rose 6.3 basis points to 3.898%, the 5-year U.S. Treasury yield rose 5 basis points to 3.689%, and the 30-year U.S. Treasury yield rose 0.1 basis point to 3.518%.

From the perspective of the yield curve, the inversion between the 2-year and 30-year U.S. Treasury yields further widened to about 45 basis points on Monday, the deepest inversion since 2000, indicating that the U.S. economy faces recession risks is increasing day by day.

At present, traders generally believe that another 75 basis points of interest rate hike by the Federal Reserve this week is basically a foregone conclusion, and some even began to wager that the rate of interest rate hike will reach 100 basis points to curb price pressures.

Investors are also raising the threshold of expectations for the peak level the Fed’s policy rate may eventually hit in early 2023, with the March OIS contract showing the market betting on a peak rate of 4.48%, indicating that short-term U.S. bond yields are likely to rise. There is room for upside.

Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, said that assuming the Fed’s dot plot shows that the terminal interest rate will reach 4.25%-4.50%, it is easy to imagine the path for the 2-year U.S. Treasury yield to rise above 4%. The 4.25% level could be a reasonable target if one believes the Fed will deliver on its promise to keep rates high for some time.

Citi strategist William O’Donnell pointed out that if the 10-year U.S. Treasury yield proves to be able to continue to rise at 3.50%, it may further test the pressure level around 3.76%, the high reached in February 2011. Can hold, and haven’t seen it since.

Are U.S. stocks becoming more and more “stressed?

The yield on the benchmark 10-year U.S. Treasury bond has always been known as the “anchor of global asset pricing”, and as it rose above the 3.5% mark overnight, this has undoubtedly once again constituted a major challenge for the U.S. stock market, which has struggled to gain a foothold this year. serious challenge.

When interest rates are at extremely low levels, such as near zero after the 2008 financial crisis and after the Covid-19 pandemic in 2020, it is easy for investors to justify putting their money into the relatively risky equities — what they get from stocks Returns are almost always higher than near-zero government bonds, making Wall Street once superstitious about the “TINA” strategy: there is no choice but to buy stocks.

However, this trend was completely reversed this year.

Yields in the U.S. Treasury market have climbed to multi-year highs after the Federal Reserve raised interest rates several times. Strategas data shows that less than 16% of the S&P 500 stocks currently have a dividend yield higher than the two-year U.S. Treasury yield, and less than 20% of companies have a dividend yield higher than the 10-year U.S. Treasury yield. bond yields. These figures are the lowest since 2006.

“In the past, many investors chose to take risks in the stock market because there was no return anywhere else. It’s time for people to rethink: Do I really need to take this risk?” Katie Nixon, chief investment officer, Northern Trust Wealth Management express.

It is worth mentioning that the real yield of the 10-year U.S. Treasury bond has now reached a level of 1.16%, the highest since 2018, and the 5-year real yield has hit the highest since 2008. Real yields show what investors can expect to earn after adjusting for inflation. At the beginning of this year, the so-called real yield was still around -1%, and its rapid rise has become a major culprit in suppressing high-growth stocks such as technology stocks.

Although the three major U.S. stock indexes generally rebounded from their lows on Monday, the overall market sentiment remained cautious. The three major U.S. stock indexes have closed down for four of the past five weeks. The Nasdaq Composite tumbled 5.5% last week, its biggest weekly loss since June. Concerns about the health of the global economy and the “spectre” of further sharp interest rate hikes by major central banks continued to spook investors.

“It feels like this is going to be a make-or-break week,” said Samy Chaar, chief economist at Lombard Odier. “The anxiety from the repricing we experienced last week is still there, and there’s absolutely no sign that sentiment is improving.”

Nixon pointed out that although at this moment, a lot of the bad news hanging over investors’ heads seems to have been digested. But it’s also difficult for markets to move higher easily, given the tightening of monetary policy, slowing U.S. and global growth and above-trend inflation. “What will be the catalysts that will drive the market higher? In this regard, the near-term picture is still very unclear.”