Macroscope | Symbolic US Treasury bond yields matter less than the impact of soaring debt levels

Over the past several days, international investors have fixated on the 3 per cent level in the yield on 10-year US Treasury bonds, a crucial benchmark for financial markets, breached on Tuesday for the first time since early 2014. 

The rise in the 10-year yield, which stood at 2 per cent as recently as last September, above the psychologically important 3 per cent mark comes at a critical time for markets. Not only are there worries about stronger inflationary pressures, fuelled by the recent surge in commodity prices, there are equally important concerns about a slowdown in the global economy, centred around Europe. If that were not enough, markets have become a lot more twitchy following a sudden eruption in volatility in early February. 

A sharper increase in the 10-year yield would fan fears about inflation, causing investors to speculate that the Federal Reserve will raise interest rates aggressively. This could put more strain on stock markets already under pressure due to concerns about lofty valuations and signs that growth has peaked. Higher bond yields, moreover, are likely to drive up the dollar which, as I noted in an earlier column, is starting to reflect the divergence in monetary policies between the United States and Europe. A sustained rally in the US dollar would be a major headwind for emerging markets.