10-Year Treasury Yield Reaches Milestone 3%
The cost of borrowing is going up. For the first time since 2014, the 10-year Treasury yield has hit 3%. As CNN Money notes, this development could bring even more volatility to the market and the economy overall.
Speaking to CNN, GAM Investments chief economist Larry Hatheway recalled that, the last time the 10-year yield surpassed 3%, it brought on dramatic volatility he called “painful.” Mere hours later, the Dow Jones Industrial Average was down more than 500 points. While there are other issues causing the pullback, the rising Treasury note likely has investors concerned that higher borrowing rates could eat into company profits.
If investors are so spooked by increasing rates, there may be more bad news on the way. This year the Federal Reserve is expected to bump up short-term interest rates twice and will likely raise them three more times in 2019. Moreover Dec Mullarkey of Sun Life Investment Management says he anticipates the 10-year Treasury yield could reach 3.5% by the end of this year.
While some are worried about the rising rates, others seem less concerned. Among them, Hatheway points out that America is not alone in this regard, as rates are rising around the world. He told CNN, “Rates are going up in a global fashion. It’s perfectly logical though and the moves are a bit overdue.” Hatheway also says that strong earnings from companies during the first quarter of the year have him anticipating that the trend will continue despite the higher interest rates. Similarly Doug Peebles of AB Fixed Income said of the rising rates, “This is consistent with a good economic backdrop.”
Although the economy is strong now, some economists suggest the next recession could hit within the next couple years. However the dip isn’t expected to be as severe as in 2008, which has been dubbed “The Great Recession.” At the same time some have voiced concern that the recent tax cuts passed by Congres could cause the economy to grow too quickly. Given these mixed messages, it’s easy to see why the market is experiencing higher levels of volatility these days — including today’s sizeable Dow drop. As always it will be interesting to see where 10-year Treasury yields go from here and how the Fed proceeds as well.