Is a 3% yield on the 10 year Treasury that big a deal?
Simple. Yes and No. The actual round number of 3% of course means nothing special to the economy. But rates moving to 3% does have several implications.
First – We moved really fast from 2.83% on April 17 to now. That means the market was likely behind in inflation assumptions. And a quick move can be a bit jarring to sensitive markets like mortgage and commercial loans.
Second – The stock market now has competition for yield (TBT) (TLT). As of today, the dividend yield of the S&P 500 (SPY) is 1.65%. Obviously when the treasury yield was 2.8%, THAT was clearly higher than the yield of the “market” as well. So why is 3% a bigger deal? It may not really be enough of a spread to cause a switch from stocks to bonds, but psychologically it may be an excuse. Look at poor 3m (MMM) today. Its yield is still a solid 2.75% – sounds competitive with treasuries, right? Except that 3M is now down 16% year-to-date! So you can go with a “riskless” (we know there is some risk) treasury yielding 3% or a (clearly highly) risky equity like 3M. Obviously there are better and worse examples than 3M, but it highlights how some investors may just shift out of risk.
Third – This related to the above point, but different. The stock market is a discounting mechanism. And when long term rates go up, future cash is worth less. So technically, the market should be a bit cheaper when rates rise that quickly.
Net-net: 3% ain’t nothin’ but a number. But that number does have some consequences. If rates settle in at a new higher range, but don’t shoot up, and the economy continues to grow, the market will still give you some opportunities. Patience, grasshopper.