Rising US Treasury yields are sending ripples through the stock market and other assets

Bond yields jumped on Tuesday as U.S. investors returned from a three-day holiday weekend, roiling stocks and sending ripples through other markets.

What happens
  • The yield on the 2-year Treasury TMUBMUSD02Y,
    3.509%
    rose 10.1 basis points to 3.499% at 3 p.m. east. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury TMUBMUSD10Y,
    3.350%
    rose 14.9 basis points to 3.339 percent, its highest level since June 15, according to Dow Jones market data.

  • The yield on the 30-year Treasury TMUBMUSD30Y,
    3.497%
    jumped 13.9 basis points to 3.482% — the highest since May 12, 2014.

What drives the markets

Stubborn inflation in advanced economies and the tendency for central bank monetary tightening continued to push benchmark US bond yields higher.

Data released on Friday showed that the US labor market remains in good shape, meaning the Federal Reserve will have little determination to continue its cycle of rapid interest rate hikes.

Fed-funds futures traders have priced in a 72% chance the Fed will raise rates by another 75 basis points to a range of 3.00% to 3.25% after its September 21 meeting. The central bank is expected to take the Fed funds rate target to 3.9% through April 2023, according to the CME FedWatch tool.

In a chart: Bad news for stocks: Fed to be surprised how hard rate hikes hit economy, says BlackRock

In addition, new restrictions on Russian gas supplies to Europe fueled fears that higher energy costs would add to price pressures, prompting the European Central Bank to raise borrowing costs aggressively at its meeting on Thursday, despite signs that its economy block is having problems.

The Institute for Supply Management said its services index rose to 56.9 percent in August from 56.7 percent the previous month – the highest level since April. Economists polled by the Wall Street Journal had expected the index to fall to 55.5%.

Treasuries extended their selloff, pushing yields higher as investors saw positive ISM data underscore expectations for an aggressive Fed. Stocks saw fresh pressure as yields rose, with the Dow Jones Industrial Average DJIA,
-0.55%
down 173.14 points, or 0.6%, while the S&P 500 SPX,
-0.41%
the Nasdaq Composite COMP also finished 0.4% lower,
-0.74%
fell 0.7%.

What the analysts say

“The closest level to break in terms of further downside is Thursday’s high at 3.549% (for the 2-year currency), and should we see that level broken, the next technical stop is not until 3.75 %,” Ian Lyngen and Ben Jeffery, strategists at BMO Capital Markets, said in a note.

“Beyond the size of September’s increase, there is what we expect will increasingly become the ‘it’ trade of the year ahead. The Fed’s efforts to fight to keep interest rates on hold in restrictive territory, even as the market tries to push for rate cuts (fine tuning or otherwise). It is the timing of the final capitulation on the part of the Fed that will be the main driver behind what we expect to be a cyclical upward re-tilt of the curve that remains operational uncertainty, but with inflation still so high and likely to remain high we expect to be a development in late 2023 at the earliest,” they wrote.

Hear Ray Dalio at the Best New Ideas in Money Festival on September 21st and 22nd in New York. The hedge fund pioneer has strong views on where the economy is headed.

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