3% Treasury Yield Triggers Puzzling Market Reaction

Ten-year U.S. Treasury yields hit 3 percent on Tuesday for the first time since 2014, but the stock market hasn’t initially reacted the way investors might expect.

What Happened

The 10-year Treasury yield reached the 3-percent psychological level Tuesday morning, triggering fears that inflation could be ramping up too quickly. Rapidly rising interest rates and inflation can eat into corporate profits. In addition, higher yields on fixed-income investments tend to sap money out of the stock market, particularly from dividend stocks.

To make matters worse, the yield curve — the difference between short-term rates and long-term rates — has been flattening. In the past, the yield curve has often inverted prior to U.S. recessions.

Why It Matters

As would be expected, the stock market tanked Tuesday, with the Dow Jones Industrial Average ETF DIA down 2.2 percent and the SPDR S&P 500 ETF Trust SPY down 1.7 percent in mid-day trading. The market leaders and laggards have been somewhat unexpected.

The iShares Dow Jones US Telecom (ETF) IYZ, which contains high-yielding telecom stocks that would typically be hit hard by rising rates, was mostly flat on the day. At the same time, the Utilities SPDR (ETF) XLU was up 0.6 percent and the iShares US Real Estate ETF IYR was up 0.1 percent. Both sectors are filled with high-yielding stocks. 

What’s Next

Investors will be keeping a close eye on where Treasury yields progress in the coming weeks, particularly when it comes to the yield curve. In addition, investors will be watching the Federal Reserve closely for commentary related to interest rates and inflation following its next meeting May 1-2.

Related Links:

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