Market Extra: Inflation data pushed the 10-year Treasury yield above 4%. How much higher can interest rates go?

by | Mar 3, 2023 | Stock Market

Signs of continued U.S. labor market strength plus persistent inflation out of Europe were all it took this week for bond investors to push yields up toward new milestones as interest-rate expectations continue to be readjusted.The 10-year Treasury yield
finished Thursday’s U.S. session above 4% for the first time since November, and traded there again as of Friday morning.

BMO Capital Markets strategists Ian Lyngen and Ben Jeffery said the benchmark rate is near the top of what they see as a 100-125 basis point trading range centered around 3.5%, meaning the rate could go as high as 4.5% or 4.75% at some point if bond-selling momentum continues. For now, Lyngen and Jeffery are putting the 10-year yield’s 4.241%-4.335% intraday peaks reached late last year back on the map.

March marks the first anniversary of the first Federal Reserve interest rate hike of the current tightening cycle, and the outlook for inflation across developed markets has only gotten murkier since. U.S. data on Friday, produced by the Institute for Supply Management, showed business conditions at service-style companies, such as hotels and hospitals, holding steady at a robust level in February. That came a day after weekly U.S. initial jobless claims came in below 200,000 for the seventh week in a row for the end of February, a sign of continued labor-market strength. Meanwhile, inflation hasn’t fallen as much as expected in either the U.S. or the eurozone, with the latter recording an annual CPI inflation rate of 8.5% for last month. Together, that’s added up to 4%-plus yields across much of the Treasury market, though the 30-year rate BX:TMUBMUSD30Y pulled back from that mark on Friday.As with almost everything in financial markets, bond trading is a two-way street. Yields tend to back up each time inflation fears prompt investors to sell off bonds. Those rates then start to ease down again as a fresh pool of investors, attracted by higher yields, jump back in to buy fixed income at more appealing returns than they might get elsewhere, such as in stocks. The latter scenario is what u …

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