Treasuries' March Above 3% Faces Challenge From Slumping Stocks

Comex Gold

Weekly June Comex Gold

The 10-year U.S. Treasury yield rose above 3 percent for the first time since January 2014, snapping out of a months-long trading range amid an onslaught of supply and a Federal Reserve intent on boosting interest rates.

This month, the yield has risen on signs that US inflation is headed slowly higher while the Federal Reserve has clearly indicated the fed-fund rates could be raised another three times in 2018. On Monday, the U.S. government 10-year note - a benchmark for mortages and corporate borrowing - rose as high as 2.995 per cent, before falling back to 2.962 in Asia on Tuesday. It's been climbing because investors expect higher economic growth and inflation. But inflation does appear to be firming, and the rise in oil prices suggests the global economy is running a bit warmer.

"Over the past two months European Central Bank rate hike expectations have corrected lower and [EUROZONE] rates have retreated significantly from their February highs", said Norbert Aul, a strategist at UBS, who noted that "confidence in an ever-stronger growth momentum has been dented", resulting in euro yields finding "a floor".

Gold found its footing in the market when the U.S. dollar lost some of its steam after reaching a three-month peak on the back of rallying United States yields.

But others argue that Treasury yields should be going up, because the U.S. economy is in good shape.

"We're not anxious when USA yields go up on the back of stronger growth, but on the back of stronger inflation, that's a whole different story", Mr. Biggs said. The US dollar is fairly mixed, following yesterday's surge.

"(A strong) dollar makes gold expensive for non-U.S. buyers and rising yields increase the opportunity cost of holding gold, which is another factor lessening gold's appeal". And bonds and stocks tend to move in opposite directions, too, so the new threshold in a benchmark bond yield bears watching.

BONDS: Bond yields slipped again.

Still, bond yields reaching 3% aren't exactly coming out of nowhere. Swiss government debt maturing in eight years still offers a negative yield.

The market for USA government debt is both larger and more worldwide than other major bond markets, leaving global investors more directly exposed to the Treasury market than US investors are to conditions elsewhere in the world.

For now, bond traders are dealing with a deluge of new debt.

Global stocks have also reacted to changes in yields world-wide.

In comparison, the defensive sectors of the same index are down by more than 3%.

"I think you may see some short term reactions in equity markets", said PNC Financial Services Group co-chief investment strategist Jeff Mills. Auto loans, home mortgages, and other loans are aligned with the yardstick 10-year yield.

But that doesn't mean there is no risk that yields rise further. "That's probably the biggest risk to Treasury yields being at these levels", added Ms. Dall'Angelo.

The Treasury Department will auction $32 billion in two-year notes on Tuesday.

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