Rise in bond yields could hit US stock market

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The 10-year Treasury yield went over 2.62 percent during trading last week, for the first time since 2014. Art Hogan, chief market strategist at B. Riley FBR, believes that it could go even higher to 2.75 percent, but said “the pain point comes at 2.63 percent, where everybody believes that’s the breakout, and everyone will be keying on that, this is a more-than-three-year range that we’re attempting to break out of here.”

Neither 2.63 percent nor 2.75 percent are high yields in a historical sense, but the rise above a lower long-term range creates the spectre of bond yields sucking money and investment away from the stock market. High yields could also result in increased borrowing costs for U.S. companies and consumers, with the 10-year yield affecting many types of business and consumer loans, even mortgages. Hogan commented further that it wouldn’t be the death knell, but for the short term “trepidation over this could cause a pause in the market”.

Bond analysts are anticipating yields to increase further in 2018, due to Federal Reserve interest rate rises and central banks in general shifting away from policies that were shaped by the financial crisis. Jeff Gundlach, the CEO of DoubleLine, has warned of higher yield rates for 2018 and believes growth and tax cuts could factor in. And last week Bill Gross predicted that the 25-year long bond bull market would end after key trend lines were broken in 5-year and 10-year yields.

Mark Cabana, head of U.S. short rate strategy at the Bank of America Merrill Lynch, believes that the yield rise is just a “culmination of a variety of factors” – continued positive economic data for the US, optimism on overall growth outlook, and raised expectations of the level of supply the Treasury market will experience. Cabana said all of these factors are “contributing to the overall steepness of the curve and rates reaching new highs.”

Any potential effects on the stock market caused by the bond yield rises could be further compounded by political quagmire in Washington if Congress does not pass a resolution by Friday night to stop a looming government shutdown.