Commentaries

PMC Weekly Review - April 27, 2018

A Macro View: “10-Year Treasury Yield Hits 3% - Should We Worry?"

The yield on the 10-year Treasury Note crossed 3% this week for the first time since 2014, drawing much attention and causing stocks to sell off, but what does it really mean for investors? The 10-year yield is an important indicator for financial markets, as it influences borrowing costs for both consumers and corporations, affecting everything from mortgage rates to corporate debt. The rise in the benchmark yield typically signals expectations of rising interest rates and rising inflation, and also is generally indicative of economic growth.

So why does the 10-year yield crossing 3% have people worried? The 3% threshold represents a psychological level of sorts for many investors, as they have become used to lower rates driven by years of quantitative easing. But now that it has reached 3%, many worry that it could trigger a negative reaction from financial markets. But is that fear justified?

The yield on the 10-year Treasury Note is a key benchmark for long-term interest rates: When it rises, it costs more to borrow. This affects spending at both the corporate and consumer level and, ultimately, could have a negative impact on the equity markets. Lower rates are generally viewed as more favorable for the stock market. That’s because higher rates mean less borrowing and less spending across the board. This often leads to lower earnings, resulting in decreased stock prices. Rising long-term yields also make equities look less attractive, as investors flock from riskier assets to the perceived safe haven of Treasurys.

So when the yield rises, many investors worry that markets will fall. Although it’s true we haven’t seen the yield on the 10-year Treasury Note at these levels for a few years now, it’s important to remember that even though 3% feels relatively high in the current environment, by historical standards, 3% is still quite low. Investors also should bear in mind that rates have been artificially depressed due to years of quantitative easing by the Federal Reserve, and that higher rates are to be expected. Rising Treasury yields still typically indicate a stronger economy, and history has shown that stock prices can still go up even when rates are rising. Eventually, rates will likely rise enough to affect the economy, but for now, strong economic underpinnings suggest that a recession is unlikely in the near term. Markets have since rebounded from the tumble they took on Tuesday, and the yield on the 10-year Treasury Note has dipped back below that 3% threshold since its initial crossing (though it may not stay there). For the time being, the economy continues to show signs of strength, and investors shouldn’t panic about the 10-year Treasury Note crossing this psychological threshold.

Rachel Mandeix
Associate Investment Analyst

Download the full PDF

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.

Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.

Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.

Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.

© 2018 Envestnet. All rights reserved.