Major Concerns as USA 10-Year Yields Test 3%

Thursday, 26 Apr, 2018

"We don't foresee the ECB making any changes at all until September, when the QE programme officially ends", said Alfonso Esparza, senior currency strategist at Oanda Corporation in Toronto, Canada, referring to the bank's purchases of bonds. Indeed, the relative strength in XBD is one reason for believing that the stock market will muddle its way through the threat of higher interest rates.

What is the 10-year Treasury yield telling us today? What matters is the difference between the two-year yield and the 10-year yield.

Growth. First of all, it is telling us the economic growth picture is solid. That can slow down economic growth. "People don't seem really concerned that borrowing costs are rising".

The rise in yields also comes amid signs U.S. inflation may be slowly creeping higher and that global central banks will continue to tighten policy in the months ahead. Consumers with stock portfolios can expect this year's volatility to continue for a while.

Analysts also attributed the pressure on stocks to a milestone climb in government bond yields on Tuesday.

Crude oil prices were up amid the prospect of fresh sanctions on Iran and concerns about output from Venezuela.

"Investors are seeing a lot more cross-currents impacting the markets. we knew that earnings were going to be very good and people are looking beyond the first quarter".

USA stocks couldn't hang on to an early gain and finished mostly lower Monday as technology companies slipped. Earlier this month the USA imposed sanctions that bar citizens from doing business with numerous Russian businessmen, including Deripaska, as well as several Russian officials and companies.

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Another potential warning sign from the bond market?

"Every bond trader around the world is watching the U.S. 10-year yield because it has been four years since we saw it at this level", said Tom Cahill, portfolio strategist at Ventura Wealth Management.

Global equities pulled back Monday, as the United States benchmark yield closely hovered around the psychologically significant three per cent level. In addition, as part of its balance sheet normalization plan, the Fed is gradually increasing the sales of US Treasuries that it holds on its balance sheet. Yields move inversely to prices. Financial markets take a deep gulp when they hear the 10-year yield and 3 percent in the same sentence. The risk of recession rises as the difference gets closer to zero.

Euro zone bond yields - yields are a proxy of borrowing costs - were dragged up in the slipstream of the USA moves though Thursday's looming European Central Bank meeting ensured there was a touch of caution. Ironically, this was despite then-Fed Chair Ben Bernanke's attempts to offer benign explanations for this phenomenon in his speech, "Reflections on the Yield Curve and Monetary Policy".

The last recession was the Great Recession of 2008 - and some economists think America is due for another downturn within the next few years, perhaps as soon as 2019 or 2020. Rather, he says rates are just getting back to normal.

Oil price increases are a "relative price change" and not inflation of itself. That's especially so given that the April ZEW survey showed a drop in expectations for the German economy to its weakest level in more than five years.

Global stocks mostly rose Tuesday as company earnings reports continued to largely beat expectations, suggesting the economy remains strong despite concerns about trade.