USA 10-year bond yield hits highest since 2014

USA 10-year bond yield hits highest since 2014

Investors once again focused on corporate deals Monday as utility company Vectren agreed to be bought by CenterPoint Energy for $6 billion, while the CEO of Sears called for the company to sell more assets and health care products company Henry Schein said it will split off its animal health unit.

And indeed, the Standard & Poor's 500 index dipped 1.3% today after months of wavering, representing a drop of more than 8% from January's high.

Earlier, tech stocks were under pressure in Asia, with Hong Kong-listed smartphone-component makers Sunny Optical and AAC Technologies down roughly 3% each, extending a recent losing streak.

"Historically, the stock market has done OK with rising inflation, provided economic momentum was also rising", Jim Paulsen, chief investment strategist at Leuthold Group, wrote in a note to clients Monday.

The yield had been flirting with the all-important psychological 3 percent level for days but, once hit, financial markets around the world reacted.

Oil's move above $70 a barrel and firmer metal prices have fanned worries about inflation, which for much of the post-financial crisis period has remained subdued and helped sustain a rally in bonds.

While the stock market gets all the headlines, the bond market is much larger and arguably more important to the economy.

If bond yields start rising, we could see investors start flowing out of equities and into bonds. That pushed stocks higher by making bonds less appealing by comparison.

On March 30, 2018, I wrote "What's going on in the bond market?". (One of the Fed's main objectives is keeping prices stable.) At the same time, higher commodity prices eat into profit margins for companies, which is bad for their stock prices. People are out spending money, and the demand pushes up the price of goods and services, what's known as inflation. Another effect of rising rates and increased competition is that it created a race to the bottom on credit quality.

"The narrowing gap between the two yields reflects investors' confidence that the Fed will maintain its current pace of interest rate increases despite continuing skepticism that growth will break out of its postcrisis torpor".

The Bank of England raised rates last November for the first time in 10 years. Well, let's say you've got $1000 to divvy up between stocks and bonds.

The least creditworthy companies have benefited from low benchmark yields, but if easy money disappears and borrowing costs rise, servicing debt would become more expensive.

More: Worried about the next bear market? "Stating the obvious, high debt levels along with higher interest rates is not the best combination".

But the ECB's reluctance so far to signal any shift leaves the "euro's gains against the dollar vulnerable to setbacks", said Commerzbank analyst Thu Lan Nguyen in a note.

But there will be lenders who will "stubbornly keep their rates as low as they can for as long as they can". The rise in the nominal rate of interest in both the 5-year and the 10-year securities were divided between factors impacting the "real rate of interest" and factors impacting the expected rate of inflation.

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