For those that follow interest rates and the underpinnings of the economy for a living, a 3 percent 10-year Treasury rate is something that should be noted. While the media may be positioning this as front page news on nearly every financial news website you check today, I don’t believe it is the watershed moment they’d like you to believe. However, it is a technical factor that warrants a lot of attention.
Although it may seem like just another number, 3 percent or 3.03 percent if you want to be precise, is the high level we reached in 2014 before the Fed announced more quantitative easing (QE) which ultimately drove the 10-year back to 1.82 percent. Therefore, the 3 percent number we’re seeing today can be viewed as a negative or a positive depending on what side of the street you’re on.
Equities fear higher rates because earnings must keep up with the rates in order to maintain a price-earnings ratio (P/E ratio) at a reasonable level. Also, given the yield on the S&P is currently at 2 percent, the index is less desirable against a 3 percent yield on a 10-year Treasury.
Fixed Income investors view higher rates as a love/hate relationship in that although the prices of their existing holdings are falling, the new levels they are able to reinvest at are at much more favorable levels. Investing in securities that yield a 3 percent plus level are a far cry from the sub 1 percent level available just a couple of years ago and should be seen as a welcomed change.
The 3 percent level is probably just a holdover spot for rates to go even higher. Once the market gets “comfortable” with saying 3 percent, we should naturally expect the next landing spot to be 3.25 percent as the U.S. economy continues to be strong enough to handle higher interest rates.