[Summary] Ahead of Fed Big Step... US 10-Year Treasury Yield Surpasses 3% Intraday, Stock Market Faces Gloom

[Asia Economy New York=Special Correspondent Joselgina] The 10-year U.S. Treasury yield, a long-term benchmark interest rate, surpassed 3% intraday for the first time since December 2018. This is seen as the market being dominated by concerns over a ‘high-intensity tightening’ ahead of the May Federal Open Market Committee (FOMC) regular meeting.

The U.S. Treasury yield, which acts as a traffic light for global market interest rates, has surged sharply this year, becoming a negative factor for global stock markets. If the U.S. 10-year Treasury yield, considered a safe asset, continues to stay above 3%, the flow of money worldwide could also change. The funding burden for households and companies, such as mortgage loans, is also rising sharply.

◆Intraday briefly above 3%...breaking psychological resistance

On the 2nd (local time) in the New York bond market, the 10-year yield hit 3.01% briefly in the afternoon. This is the first time since December 2018 that the 10-year yield has entered the 3% range, known as a ‘psychological resistance level.’ The 2-year yield, sensitive to monetary policy, was at 2.719%, the 5-year yield at 3.010%, and the 30-year yield at 3.060%.

This sharp rise in Treasury yields is due to the recent rate hike moves by the U.S. Federal Reserve (Fed), which has positioned itself as an ‘inflation fighter.’ In early March, before the rate hikes, the 10-year yield was around 1.6%, not much different from the end of last year (1.512%). However, starting with the March FOMC, the Fed’s stance became much more hawkish than initially expected by the market, causing the 10-year yield to nearly double. Prolonged factors such as the Ukraine war, worsening supply chains, and wage pressure have further fueled inflation concerns, pressuring the Fed and bond markets.

The Bloomberg U.S. bond index, which reflects prices of U.S. Treasuries, high-grade corporate bonds, and mortgage-backed securities (MBS), has fallen 9.5% through April 29 this year. Bond prices and yields move inversely.

The sharp rise in Treasury yields is seen as a factor that increases funding burdens for companies and households, delivering a direct blow to economic recovery. Especially for the U.S. 10-year yield, which is linked to mortgage, auto loans, and student loans in the U.S., widespread repercussions are inevitable. Whitney Swinney, an investment strategist at Schroders, told CNBC, "Students taking out college loans for the next academic year will definitely feel the (linked) effect of the 10-year yield rise," adding, "Mortgage rates have also surged sharply since the beginning of the year."

Corporate funding burdens are also bound to increase. The April manufacturing Purchasing Managers’ Index (PMI) released by the U.S. Institute for Supply Management (ISM) on the same day was 55.4, below both market expectations (57.8) and the previous month (57.1). This indicates that activity in the U.S. manufacturing sector is already slowing.

As bonds become more attractive relative to stocks, this is also negative news for stock investments, including growth stocks. The Nasdaq index fell 13.3% last month, marking the largest monthly decline since October 2008. Some even raise concerns about potential capital outflows from emerging markets.

Ryan ALM analyzed, "In the past 10 years, the 10-year yield has closed above 3% only 64 times," adding, "These periods can be characterized by growth slowdown and inflation."

◆Fed signals big step, focus already on June

Treasury yields are expected to remain at high levels around 3% for the time being. The central bank, the Fed, has signaled a so-called ‘big step’ of raising rates by 0.5 percentage points at once to curb inflation, which is at its highest level in over 40 years. If quantitative tightening, including balance sheet reduction, is fully implemented, long-term yields are expected to face further upward pressure.

Market attention is already focused on the June Fed meeting. There is also speculation about a ‘giant step’ rate hike of 0.75%. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) rate futures market reflects a 98.7% probability of a 0.5 percentage point hike this month. The probability of a 0.75 percentage point hike in June exceeds 90%.

Some analysts suggest that 3.25%, rather than the psychological resistance level of 3%, will be a more important threshold. The 3.25% level corresponds to the 10-year yield around November 2018, when the Fed last raised rates before the pandemic. Ben Jeffrey, a rate strategist at BMO, said, "If rates exceed this, it will have a negative impact on risk assets." Quincy Crosby, a strategist at LPL Financial, said the direction of yields will depend on Fed Chair Jerome Powell’s remarks this week. He noted, "It will be problematic if growth conditions slow," pointing out that after the 10-year yield hit 3.25% in 2018, a market tantrum was confirmed.

The rise in Treasury yields has also been accompanied by a stronger dollar. The Dollar Index, which measures the value of the dollar against six major currencies, rose 0.64% from the previous trading day to 103.61. The New York stock market ended the day higher after fluctuating throughout the session.

This content was produced with the assistance of AI translation services.