The 10 year US Treasury note is the benchmark bond issued by the US government. With the full faith and credit of the US government, it is one of the most popular debt instruments in the world. Its return, the return it receives on investment in the bond, is used to set interest rates on many forms of long-term consumer and business debt, such as mortgages, auto loans and the financing of machinery and equipment.  The 10-year Treasury bond yield has risen to close at 3 percent on Wednesday – a barrier that many in the financial markets see as a harbinger of economic and stock markets. It was the highest rate of return since January 201
So why are the financial markets? concerned about the interest rate of 10-year treasury note reach 3 percent? Most on Wall Street will readily admit that the 3 percent limit is not a hard line in the sand – where a 2.95 percent return is okay, but 3 percent or more is an impending disaster. However, it highlights the challenges that arise when interest rates start to rise above a certain level.
Over the past year, a strengthening US economy, the labor market and the global economy have raised concerns about rising inflation. Robust demand for goods and services is driving our economy, but prices are also rising. To prevent prices from skyrocketing, which could prematurely halt consumption and business spending, the Federal Reserve is tapping cautiously on economic pauses by gradually increasing debt costs through coordinated rate hikes.
Since December 2015, the Fed has introduced six .25% percentage rate hikes on the benchmark Fed funds rate, which is often based on short-term debt. The most recent rate hike came in March, with two more this year and three in 2019. These rate hikes, along with other Fed monetary policy measures, have helped drive both short-term and long-term interest rates.
However, the continuing strength of the US economy and labor market as well as rising corporate profits worried that the Fed will raise interest rates even more aggressively to keep inflation under control.
The main driver of long-term interest rates is a 10-year treasury margin of 3 percent or more pushing long-term borrowing costs to levels that can have a significant impact. For consumers, there is less demand for car loans, mortgages and personal loans for bulk purchases. For companies, the increased equipment, technology and infrastructure borrowing costs reduce their profit margins, which is reflected in their corporate earnings and share prices.
As an example, we look at Caterpillar, which announced its first-quarter earnings on Tuesday. Caterpillar achieved record sales, posting the highest first-quarter profit in its 93-year history. In addition, the company predicted continued growth due to its customers' solid demand for goods and services. However, their statement that first-quarter earnings (revenue-spending) would be "the high-water mark for the year" dropped the stock. On Tuesday, the stock fell $ 9.55, or 6.2 percent, to $ 144.44. With Caterpillar often being seen as an indicator of the health of the US economy and the stock market, the Dow Jones Industrial Average fell 425 points, reflecting concerns about higher borrowing costs for the rest of America.
Now reaching the 3 percent mark on the 10-year Treasury note is not the end of the world. Historically, the US economy and stock markets have thrived in a similar environment. And remember, the higher interest rates result from a strong and dynamic economy. As a result of global economic growth, the countries of the world are also experiencing rising interest rates.
Yes, there are alarm signals for the future profitability of US companies. Higher bond yields also pull money away from the stock market as investors dodge the uncertainty of equities for the safety of bonds, which now offer higher returns. All eyes are on the Fed. Rising interest rates pose risks, and next year the Fed needs to implement its rate hike agenda with minimal market disruption.
Mark Grywachski spent more than 14 years as a professional trader in Chicago, where he served on various committees for several global financial exchanges and as an industrial arbitrator for more than a decade. He is an expert in financial markets and economic analysis and is an investment advisor with Quad-Cities Investment Group, Davenport.
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