It isn’t the level that matters, but the pace of the move.
That is the consensus of bond-market investors when asked at what threshold the Treasury yield surge will start to weigh on risky assets.
Higher Treasury yields are likely to be embraced by the Federal Reserve as a sign that its accommodative policy was helping to boost growth and inflation expectations. But if rates move too quickly and tighten financial conditions, it could cause unnecessary turbulence in risky assets at a time when the pandemic is still barring a return to economic normality.
“Yields jumping has a tremendous effect on all assets. The pace of that yield jump would ripple through all the various different assets and countries,” said Clifton Hill, a portfolio manager at Acadian Asset Management, in an interview.
Those fears appeared to take hold as the Dow Jones Industrial Average DJIA, -0.04% drifted lower Wednesday after squeezing out another record close in the previous session. The S&P 500 SPX, -0.43% and Nasdaq Composite COMP, -1.24% traded weaker, after hitting records at the end of last week.
“The equity market is clearly reluctant to rally further as interest rates go up rapidly,” said Hans Mikkelsen, a credit strategist at BofA Global Research.
The potential for a disorderly rise in inflation, powered by accommodative monetary conditions and copious fiscal relief, to lift long-term bond yields is unnerving investors who assumed depressed interest rates would continue to support stocks, corporate bonds and other risky assets.
Wall Street forecasters have remarked how long-term bond yields had already reached their year-end targets formulated in December.
The select group of brokers that can transact with the Federal Reserve, or primary dealers, on average had expected the 10-year note yield TMUBMUSD10Y, 1.279% to arrive at 1.30% at the end of this year. The benchmark maturity traded at an intraday high of 1.33% on Wednesday.
Others are more skeptical whether the recent bond-market moves are a cause for concern.
Tom Graff, a portfolio manager at Brown Advisory noted the recent volatility was in line with how bond markets perform when the economy was recovering from a recession.
“The rates market is slowly buying into the idea of a robust economy and figuring how to price that in,” Graff told MarketWatch.
And for the most part, bond investors will welcome higher interest rates even if it damages the value of their holdings as the promise of filling up their portfolios with richer-yielding securities can offset those losses.
“Treasury yields gradually going higher is not a bad thing, in fact from a fixed income point of view this is very healthy and will help us position in a more balanced way in the future,” wrote Mark Holman, chief executive at TwentyFour Asset Management.