Yields on long-dated US Treasuries are now hovering at a level that could spell bad news for stocks and other asset classes, according to multiple market strategists.
HSBC says that the sell-off in bonds earlier this week propelled the 30-year Treasury yield to 5.19%, the highest level in 19 years, while the yield on the 10-year has soared to 4.667%, CNBC reports.
“US Treasuries are now firmly in the Danger Zone – the level of 10Y UST that tends to put pressure on virtually all asset classes.”
When bond rates soar, investors have historically dumped stocks and other risk assets in favor of the safer and less volatile US Treasuries. At a 4.6% yield, investors can get solid returns on their investments with far less uncertainty.
HSBC adds that yields could move “even further into the Danger Zone, likely leading asset classes lower” as investors prepare for the possibility that the Fed might hold or even raise rates this year due to sticky inflation. The Bureau of Labor Statistics reported that the Consumer Price Index (CPI), an inflation measure, soared to 3.8% in April, hotter than the 3.7% consensus forecast.
For now, the bank says equities appear to be holding up as investors continue to ride the earnings growth story with valuations compressing following the Q1 marketwide correction. HSBC also says investors appear to believe that geopolitical tensions in the Middle East will mostly impact oil prices.
Meanwhile, Interactive Brokers chief strategist Steve Sosnick says markets are now flashing a “yellow alert,” and sustained moves higher in the 10-year and 30-year yields could put more pressure on stocks.
And BMO Capital Markets strategist Ian Lyngen echoes the sentiment, warning that if 30-year yields move to 5.25% over the next few months, equity valuations could witness a meaningful correction.
At time of writing, the US 30-year Treasury yield is trading at 5.077%, while the 10-year is at 4.552%.
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