3% Treasury Yield Triggers Puzzling Market Reaction

The 10-year Treasury yield above 3 percent could cause 'proper herding' into tech stocks, fund manager says

The market for previously owned homes accounts for about 90 percent of USA home sales.

An improving economy and expectations that inflation will continue to rise on the back of a oil price rally and Donald Trump's tax cuts have lifted the yield of benchmark 10-year Treasuries close to three percent and near its highest level since 2014.

Oil price increases are a "relative price change" and not inflation of itself.

As rates rise in the USA, global investors may be shifting cash to take advantage of higher returns, affecting trillions of dollars' worth of assets in markets around the world. It climbed as high as 3.0014 percent on Tuesday.

Russian aluminum giant Rusal soared more than 40 percent in Hong Kong after the US Treasury said it would consider lifting sanctions if tycoon Oleg Deripaska gives up control of the company.

The amount of dollar bonds issued in developing countries has more than tripled to almost $3 trillion since 2008 and the start of the financial crisis, according to Bank for International Settlements data.

"It's a big psychological level that has held for quite some time and is a level that global investors are focusing on for direction", Justin Lederer, an interest-rate strategist at Cantor Fitzgerald, said before the level was breached.

Dollar rises in Asia with Treasury yields, Japan exporters rally
But the prospect of a deluge of new government debt has weighed on the $14.9 trillion Treasuries market. Besides that, financial markets will take into account where the core US inflation rate is headed for.

Emerging-market bonds typically suffer more when inflation is driving USA yields higher.

Duane McAllister, senior portfolio manager for Baird Advisors, said he doesn't think rising yields are a problem for the stock market.

But others argue that Treasury yields should be going up, because the USA economy is in good shape. "But we're really anxious the Fed will make a mistake". Natural gas rose 1.5 percent to $2.78 per 1,000 cubic feet.

Billionaire bond investor Jeffrey Gundlach told CNBC on Monday that if the 10-year yield does crack the 3 percent ceiling, traders may then get the confidence to bid rates even higher.

The dollar previously climbed in response to USA yields rallying, pushing prices to their highest since mid-January.

It follows a period in which the greenback has stayed weak, even as us yields outstripped those in other countries. As holding United States dollar-based investments becomes relatively more attractive (i.e.as real interest rates rise), gold prices are falling as a result.

Major U.S. stock indexes fell sharply Tuesday as investors sold technology and industrial stocks. "This explains the moves for U.S. bonds".

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As the U.S.'s 10-year Treasury yield hit 3.001 percent, Germany's 10-year Bund yield rose to as high as 0.652 percent. Swiss government debt maturing in eight years still offers a negative yield.

Oil's move above $70 a barrel and firmer metal prices have fanned worries about inflation, which for much of the post-financial crisis period has remained subdued and helped sustain a rally in bonds. Stocks were flat Tuesday morning.

In comparison, the defensive sectors of the same index are down by more than 3%.

From the turn of the millennium to 2007, the 10-year US Treasury yield averaged 4.7 per cent, according to Reuters data.

"If it doesn't go much sharply higher, I think it'll be limited in terms of reactions in global markets and in equities", said Silvia Dall'Angelo, senior economist at Hermes Investment Management. That could come, for instance, from an increase in supply.

"Yesterday was a big day in terms of treasury yields impacting currencies". It will auction $29 billion of seven-year debt on Thursday.

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