Long-term U.S. Treasury yields are now hovering at levels that could spell bad news for stocks and other asset classes, according to several market strategists.
HSBC says the sell-off in government bonds earlier this week pushed the yield on 30-year government bonds to 5.19%, the highest level in 19 years, while the yield on 10-year government bonds rose to 4.667%, according to CNBC. reports.
“US Treasuries are now firmly in the danger zone – the 10Y UST level that typically puts pressure on virtually all asset classes.”
When bond yields rise, investors have historically dumped stocks and other risky assets in favor of the safer and less volatile U.S. Treasury bonds. With a yield of 4.6%, investors can earn a solid return on their investments with much less uncertainty.
HSBC added that rates “could move further into the danger zone, likely pushing asset classes lower,” as investors prepare for the possibility that the Fed will maintain or even raise rates this year due to persistent inflation. The Bureau of Labor Statistics reported that the consumer price index (CPI), a measure of inflation, rose to 3.8% in April, higher than the consensus forecast of 3.7%.
For now, the bank says shares appear to be holding up as investors continue to ride the earnings growth story while valuations fall following the market-wide correction in the first quarter. HSBC also says investors appear to believe that geopolitical tensions in the Middle East will mainly impact oil prices.
Meanwhile, Interactive Brokers chief strategist Steve Sosnick says markets are now on a “yellow alert,” and continued rises in 10- and 30-year yields could put more pressure on stocks.
And BMO Capital Markets strategist Ian Lyngen echoes this sentiment, warning that if 30-year yields rise to 5.25% in the coming months, stock valuations could see a meaningful correction.
At the time of writing, the 30-year US Treasury yield is trading at 5.077%, while the 10-year yield is at 4.552%.
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