Ten year treasury yield close to exceeding 3%

Gold prices dropped back to the levels of around a week ago with easing geopolitical tensions

Gold prices dropped back to the levels of around a week ago with easing geopolitical tensions

It has benefited in recent weeks from concerns over the US-China trade dispute, sanctions on Russian Federation and unrest in the Middle East, but has been kept in check by the prospect of further interest rate hikes from the Federal Reserve. The bond market is facing a lot of scrutiny.

This week the gap between US and German 10-year government bond yields has hit its widest in 29 years and the US-Japanese 10-year yield spread reached its broadest in almost 11 years.

Higher US yields have played a role in supporting the Dollars as surging oil prices make for a compelling inflationary storyline.

The US dollar hit a four-month high on Wednesday after a rise in benchmark US Treasury yields above 3% rattled some currency bears while a mixed picture from business surveys failed to help the euro before a European Central Bank meeting. With this said, look at another chart below and pay close attention to the lines drawn and the circled area.

S&P 500 futures were recently down 0.3% after the index slid 1.3% Tuesday, hit by a warning from heavy-machinery manufacturer Caterpillar that first-quarter results could be a "high-water mark" for the year and 3M narrowed its revenue and profit forecast for the year amid higher raw materials costs.

THE QUOTE: "The U.S. dollar has put on a compelling show overnight as the stars align on the back of higher U.S. yields and a considerable reduction in the U.S. dollar's geopolitical risk premium as an outwardly calmer mood surrounding trade and geopolitical risk takes hold", Stephen Innes of OANDA said in a commentary. Now we are at a critical level (the red circle).

"Historically speaking, the 10-year US Treasury in the 3% territory doesn't bode well for the equities market", said Min Byungkyu, a global market analyst at Yuanta Securities Korea, adding, "The market needs some time to absorb the shock from the rising US Treasuries". Plus if you want to invest your money elsewhere, you can just sell them to somebody else.

Why Does the Bond Market Matter?

In my recent blog Investors Must Watch Bond Market for Signs of Economic Strain: "Investors could do well watching the bond market as the idea of tax cuts and more spending in an economy that has full employment and a large budget deficit is an interesting challenge to the conventional economic thinking".

If someone is enrolled in a pension plan, chances are they could be impacted by the bond market.

"The current worry isn't too much on U.S". "Stating the obvious, high debt levels along with higher interest rates is not the best combination". American consumers got more confident in the economy in April, according to a survey by the Conference Board. For instance, mortgage rates are highly dependent on how the bond market behaves.

There aren't any major economic releases on Wednesday, but investors should continue to watch USA interest rates, the dollar and the stock market. Theoretically, the yield on TIPS is supposed to serve as a proxy for the real rate of interest and the real rate of interest is supposed to be related to the expected real rate of growth of the economy. It spells trouble ahead.

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