The 10-year yield is closing in on the key 3% level. Modest selling on Monday has the yield up 2 basis points at 2.98%. It has not hit 3% since January 8, 2014.
The 10-year fell from a high of 2.95% in February to a low of 2.71% in March. It has been grinding higher since President Donald Trump announced tariffs on steel and aluminum at the beginning of March.
But that rally intensified last week, with the 10-year climbing 15 basis points since Wednesday as data out last week showed the tariffs were causing prices to perk up.
First, the Fed’s Beige Book pointed to growing inflation worries. “There were widespread reports that steel prices rose, sometimes dramatically, due to the new tariff,” the Fed said.
Then, the Philly Fed’s prices paid index surged on the back of President Donald Trump announcing tariffs. “Price increases for purchased inputs were reported by 59 percent of the manufacturers this month, up notably from 44 percent in March,” the report said.
That has prompted more talk the Federal Reserve could hike rates as many as four times this year. It has previously said it sees three rate hike in 2018.
The 3% level has been closely watched on Wall Street because of the implications a breach could have on the stock market.
Jeff Gundlach, the founder of DoubleLine Capital, forecast in January that returns on the S&P 500 this year would be negative, and said that his forecast “would become an extraordinarily strong conviction as the 10-year starts to make an accelerated move above 3%.”
And a breakout is possible if we get to 3%.
“With 10y Treasury yields above the 2.95% YTD high, the market is setting up for a break above 3.00%,” Morgan Stanley strategist Matthew Hornbach wrote in a note to clients on Friday. “A break above 3.00% suggests 3.25%, while failure suggests a retest of 2.70%.”
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