In April 2018, the 10-year US Treasury yield broke through the critical 3% level. This left analyst wondering what it could mean for the future of the US and global economy.
In April, the yield on this important benchmark bond, which is used to set the price for various debt instruments around the world, went a bit above 3%, a level that some in the market say is dangerous for many investments and the US economy. It also is an important psychological level for the markets because there has not been a 3% yield on 10-year Treasury bonds since 2013.
Many finance wonks think the up or down movement of the 10-year Treasury bond is a crystal ball that can tell us when we will have inflation, recession, bull and bear markets, higher and lower home prices, corporate profits, etc.
As yields rise, and they move inversely to the price of the bond, market players expect higher interest rates from banks, such as in the mortgage markets. Because of higher interest rates, it is likely that companies will see higher costs when they borrow money and will not have as much money to increase salaries and to invest and provide returns to shareholders. Because the 10-year note is so important to set mortgage rates, it can reduce people’s abilities to buy homes.
This has been possibly happening in 2018, as mortgage rates have surged past 4.5%, and some analysts think we could see 5% in the next year. Rates have been moving higher than people’s salaries and wages have increased, and this could prevent some people from buying homes, especially in more expensive areas.
Some high net worth bond investors have said this month that if the 10 year yield goes well above 3%, then traders will being to bet that rates could go higher. This could fuel fears that a market crash will occur and could lead to a significant downturn in the stock market.
However, others argue that the US Federal Reserve has a lot of room for additional rate hikes and this will not seriously damage markets. After all, rates have been kept extraordinarily low since the 2008 market crash.
Others say the 10-year Treasury would need to rise above 4% before it started to really compete with the stock market, especially because of the level of earnings per share that people are seeing from the S&P 500 companies.
The stature of the 10-year Treasury is because so many investor regards it as free of risk. It makes it the one asset to which all others are compared to – mortgages, stocks and bonds. Treasuries are considered risk free because they are backed by the federal government and its ability to levy taxes. Stocks and corporate bonds are higher risk and can fail.
How the 10 Year Treasury Rate Affects You
As the yield on the 10-year note rises above 3%, so do the rates on 10 and 15-year mortgages. That is because the investors who buy bonds want the best rate with the lowest return. If the Treasury note rate drops, then rates on other less safe investments may fall.
Mortgage and other rates on other loans will always be higher than the 10-year Treasury. They need to provide compensation to investors for a higher risk of default. Even if the 10-year Treasury rate falls to zero, mortgage interest rates would still be higher. After all, mortgage lenders have to cover processing costs.
When the benchmark Treasury rate rises, it makes it more costly for you to own a home. You are paying the bank more interest to borrow the same amount of money. As home buying becomes more expensive, demand will generally fall.
While some experts worry about the rate on Treasuries rising above 3%, it is important to keep in mind that higher rates generally mean a stronger economy. There is low unemployment and rising wages, so people needing to pay higher interest rates on mortgages and other loans should be able to handle it, at least theoretically. Rates were extremely low for many years after the last downturn, and this recent uptick in rates is to be expected.