Macroscope | Relax, the US government bond market is not falling off a cliff
Fears that we are approaching the tipping point for 10-year Treasurys are overblown
Financial market commentators and investment strategists love psychologically important numbers.
The one which is receiving the most attention right now is the prospect of a 3 per cent yield on the benchmark 10-year US Treasury bond.
On Wednesday, the 10-year yield rose to 2.74 per cent for the first time since April 2014, contributing to the sharpest two-day fall in US equities since last May and fuelling speculation about the likelihood of the 3 per cent level being breached by the end of this year, or possibly sooner. The 10-year yield has already shot up more than 30 basis points since the start of this year, its sharpest monthly increase since November 2016, according to data from Bloomberg.
The sudden decline in stocks earlier this week is focusing attention on the point at which the fall in the price of Treasury bonds starts to seriously affect the performance of other asset classes, notably corporate bonds.
Is it a yield of 3 per cent, 3.2 per cent, 3.5 per cent, or possibly even higher?
Bank of America Merrill Lynch claims that “three is the magic number” based on feedback from its clients suggesting that a correction in markets will occur only when US economic growth exceeds 3 per cent year-on-year (it was 2.6 per cent last quarter), wage growth surpasses 3 per cent on an annualised basis (it was 2.5 per cent last month), the 10-year bond yield reaches 3 per cent and the benchmark S&P 500 equity index closes above 3000 (it stood at 2822 at the end of trading on Wednesday).