Rising Treasury yields have spooked the stock market. Relief may be on the way.

 

Following a two-day selloff in the longest-dated maturities that sent yields to one-month highs, buyers returned to the U.S. government-debt market on Thursday. This kind of buying interest could keep Treasury yields in check going forward. 

The selloff in Treasurys on Tuesday and Wednesday drove the yields on the 10-year BX:TMUBMUSD10Y and the 30-year BX:TMUBMUSD30Y to 4.62% and 4.74%, respectively — levels not seen since April 30 — and alarmed investors in the stock market.

Bulls in the stock market had been partially depending on the notion that, prior to this week's increase in yields, borrowing costs and, thus, market-based rates, had already peaked. The two-day bond market selloff, which was sparked by this week's poorly received government auctions and remarks from Minneapolis Federal Reserve Bank President Neel Kashkari that seem to keep a Fed rate hike on the table, ended on Wednesday with the Dow Jones Industrial Average DJIA closing at its lowest level since May 2 and the S&P 500 SPX closing at a two-week low.

The bond market saw a shift on Thursday as bidders emerged overnight on the strength of dip buying, while stocks continued to decline into the afternoon due to potential profit-taking and weak quarterly revenue guidance from Salesforce CRM, which had dropped by -21.15% the day before. As of midday trading, the 10-year yield dropped almost 7 basis points to 4.55%.

It can be observed that yields in the bond market move against prices. When there is a flight to safety, apprehensions about the health of the US economy, or both, the demand for government debt increases, and they normally decline. On the other hand, during periods of increased economic confidence or concerns about inflation and higher-than-expected interest rates, traders tend to sell off Treasurys, which causes yields to climb.

For a variety of borrowing expenses in the US economy, the 10-year yield is used as a benchmark rate. Concerns regarding operating costs at many operations rise when the yield rises, making government debt appear more alluring than stocks. Purchasing government debt when yields are likely already at their lowest is the most profitable approach to trade Treasurys.

In addition to noting that the 10-year note is only one or two weak economic data prints away from rallying back, BMO Capital Markets strategists Ian Lyngen and Vail Hartman said they took "solace in the stabilizing bid" seen in the Treasury market on Thursday. This would send the corresponding yield back to the mid-May lows of 4.3% to 4.4%.