By Riva Gold and Michael Wursthorn
-- Treasury yields near 3%
-- Dollar strengthens
The yield on the 10-year U.S. Treasury note climbed within
striking distance of 3% Monday, sending a chill through the stock
market.
The S&P 500 edged higher after it wobbled between small
gains and losses Monday morning as the 10-year yield touched its
highest mark in more than four years. Stock-market investors were
cautiously waiting to see whether yields picked up enough pace to
move past 3%, something that hasn't happened since 2013.
"Investors are more inclined to sit on their hands to see if
there's a break out in yields," said Michael O'Rourke, chief market
strategist at the brokerage firm JonesTrading.
The S&P 500 climbed 0.4%, while the Dow Jones Industrial
Average added 47 points, or 0.2%, to 24508. The Nasdaq Composite
edged up 0.7%.
The 10-year Treasury yield is a key metric affecting borrowing
costs for companies and consumers, and some analysts worry that
rising rates can pose a threat to economic growth and corporate
profitability.
A half a percentage-point increase in the 10-year U.S. Treasury
note earlier this year forced investors to consider whether the
run-up in stock valuations could still be supported in an
environment where less-risky assets offer a greater yield. That
contributed heavily to the February selloff that initially knocked
the Dow industrials and the S&P 500 into correction
territory.
Major indexes have mounted somewhat of a recovery since then as
many investors said strong corporate earnings and continuing global
growth would help keep equity valuations desirable.
But if the 10-year Treasury note climbs past 3% and shows signs
of moving toward 3.25% and higher, investors will again be forced
to ask whether it makes sense to stay invested in riskier assets
with lower yields.
The yield on the S&P 500 was about 2% as of earlier this
month, according to S&P Dow Jones Indices. The 10-year Treasury
yield, which rises as prices fall, was last at 2.971%, according to
Tradeweb, up from 2.949% on Friday.
Several analysts said the stock market will likely be able to
support the 10-year Treasury's initial move above 3%, but once
yields hit at least 3.25%, or more likely 3.5%, a rotation out of
equities and into bonds is likely.
"It'll look like a bear market in bonds, which should make
investors concerned since risk-free assets will be yielding more"
than many stocks, said Mr. O'Rourke.
The climb in bond yields will also force investors to scrutinize
a heavy supply of government bond auctions this week, added Eric
Freedman, chief investment officer of U.S. Bank Wealth
Management.
The Treasury is scheduled to sell $113 billion of notes this
week, and $116 billion of short-term bills. The government
increased its longer-term note and bond issues by $42 billion for
the months of February through April, and analysts expected a
similar increase for the next three-month period. The initial note
offering is scheduled to be a $32 billion sale of two-year
Treasurys on Tuesday.
Unlike in February, market participants have already moved to
price in a faster pace of interest-rate increases from the Federal
Reserve, with CME fed-funds futures showing investors now see a
roughly 47% chance of three or more rate increases this year.
"The market's already adjusted to pricing that faster pace of
rate rises, so it's less of a concern," said Mike Bell, global
market strategist at JPMorgan Asset Management.
Eric Robertsen, global head of forex, rates and credit research
at Standard Chartered, said yields were rising because an increase
in commodity prices had raised expectations of higher inflation.
Crude-oil prices fell 0.8% at $67.60 a barrel, but are up 3.9% on
the month.
The rise in yields also comes amid signs that U.S. inflation may
be slowly creeping higher and that global central banks will
continue to tighten policy in the months ahead. The gap between
10-year Treasury yields and inflation-linked bonds of the same
maturity is at its widest since 2014, suggesting that investors are
demanding more protection against rising prices.
"We've seen an intuitively appealing confluence of factors
leading rates higher -- central-bank stimulus being unwound, global
growth improving, the U.S. tax reform story," said Lyn
Graham-Taylor, senior rates strategist at Rabobank.
In Europe, bank and insurance stocks, which tend to benefit from
a rising rate environment, performed better than so-called bond
proxies such as real estate and utility companies, and the food and
beverage sector. Still, the gains weren't enough to lift the Stoxx
Europe 600, which was recently down 0.2%.
Earlier, Asian stock markets mostly inched lower following a
decline in U.S. equities late on Friday. Japan's Nikkei Stock
Average edged down 0.3%, and Hong Kong's Hang Seng fell 0.5%.
--Joanne Chiu and Mike Bird contributed to this article.
Write to Riva Gold at riva.gold@wsj.com and Michael Wursthorn at
Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
April 23, 2018 12:27 ET (16:27 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.