Global stocks drop as 10-year Treasury yields pierce 1.5% for the first time since the pandemic

Global stocks drop as 10-year Treasury yields pierce 1.5% for the first time since the pandemic
Traders work on the floor of the New York Stock Exchange (NYSE) on March 16, 2020 in New York CitySpencer Platt/Getty Images
  • Global stocks fell on Friday, as Treasury yields headed towards their highest levels in over a year.
  • A selloff in global sovereign bonds indicates expectations of a strengthening economy over the coming months.
  • The spike in the 10-year-yield this month is spooking the stock market, a chief market strategist said.

Global stocks dropped sharply on Friday, as the benchmark 10-year Treasury yield rose above 1.50% for the first time since the onset of the pandemic, driven by the prospect of accelerating growth and inflation that could trigger a faster rise in interest rates than many expect.

Futures on the S&P 500, and Nasdaq 100 rose by around 0.3%, while those on the Dow Jones edged up 0.1%, suggesting a modestly stronger open for US markets later on. Yields on the 10-year US treasury note stood at 1.468% on Friday, down around 4 basis points on the day, and down from a session high of 1.556%.

A stronger-than-expected US jobs report added to an expectation that the Fed could withdraw stimulus sooner than anticipated, and pushed Treasury yields towards their highest since last February in highly volatile trading. The sharp move higher in bond yields triggered a steep fall in US equities and tech stocks in particular suffering big losses.
The spike in the 10-year-yield is spooking the stock market, according to Ryan Detrick, chief market strategist at LPL Financial. "Could there be more inflation coming than what most think? Although the Fed isn't worried about that, the market might be."

Higher Treasury yields call for lower stock market valuations and make stocks look less attractive. "If an investor can score a higher yield in the bond market, they may move money out of stocks and into bonds," said James McDonald, CEO and chief investment officer at Hercules Investments.

Driving rates higher has been a combination of higher growth expectations as well as higher inflation expectations, according to Charlie Ripley, senior investment strategist for Allianz Investment Management. "Until recently, market participants have been able to digest the upward drift in long-term rates, but it appears that the next leg up in interest rates is a bigger bite to chew," Ripley said. "Looking at where real yields were at, they were simply too low when considering growth expectations, and it's likely that long-term real yields will continue to drift higher as economic data improves."

Another reason for equity market weakness is that many participants have referenced the infamous "Taper Tantrum" in 2013 as a similar playbook to today, according to Brian Price, head of investment management at Commonwealth Financial Network. The notable difference today, he said, is that the Fed seems very committed to letting the economy run a little hotter than normal and will tolerate higher inflation.

Broad declines sweeping the US and developed market bonds caused Asian markets a few headaches. China's Shanghai Composite fell 2.1%, Japan's Nikkei fell 3.9%, and Hong Kong's Hang Seng fell 3.5%. The sell-off continued in Europe as the UK's FTSE 100 fell 1%, the Euro Stoxx 50 fell 1.2%, and Germany's DAX fell 1.1%.

Bitcoin was on track to record its worst week in almost a year after dropping 11%, to $45,157.

Oil prices fell sharply as rising Treasury yields meant US-dollar priced oil was made more expensive. Brent Crude fell 1.1%, to $65.36, and West Texas Intermediate fell 1.2%, to $62.73.