A key interest rate tops 4%

The 10-year Treasury yield hits levels not seen since June as the economy strengthens -- and investors start to fret about inflation.

By Charley Blaine Apr 5, 2010 1:07PM
© Image Source/photolibraryUpdated: 1:20 p.m. ET

There was a lot of excitement today about stocks pushing to new highs. The bond market, however, served notice that rising stocks have a cost: rising rates.  

The yield on the 10-year Treasury note hit 4% this morning, a level not seen since June, a reflection of a stronger economy as well as worries about inflation.

The yield hit 4.03% at 11:45 a.m. ET, pushed to 4.05% by 1 p.m. and was just below 4% at 1:25 p.m.
The immediate cause of the rate increase was today's stock market rally, which drew money away from bonds, forcing yields to rise to compensate. At 1:25 p.m. ET, the Dow Jones industrials ($INDU) were up 43 points to 10,970. The blue chips had hit a high of 10,988 around 10:40 a.m.

But bond prices moved lower. And the iShares Barclay's 7-to-10 Year Treasury (IEF) exchange-traded fund fell 0.9% to $88.26. Bond prices move in the opposite direction of yields.

Stocks were moving higher in response to Friday's decent jobs report as well as two bullish reports today:
  • The National Association of Realtors' Pending Sales Index for February, which jumped an unexpected 8% from January.
  • The Institute for Supply Management's non-manufacturing index rose to 55.4 in March, better than the expected 53.5 and up from 53 in February.
At the same time, the Federal Reserve has scheduled a meeting this afternoon to discuss its discount rate, which it charges member banks for short-term loans.

The 10-year Treasury is highly important to the economy because most mortgage rates are derived from it. iShares Barclays 7-to-10-year Treasury ETF

The rule of thumb is to add 1.2 to 1.5 percentage points to get the rate for a 30-year fixed-rate loan. Bankrate.com estimated the national 30-year mortgage rate at about 5.2% today. That's up from the 5% rate that held through much of March.

There is a concern that if the 10-year rises too quickly, it could choke off any housing recovery. On the other hand, rising interest rates could be good for savers, whose returns have tumbled as interest rates have fallen.

The 10-year yield briefly hit 4.01% on June 11, 2009, but immediately fell back. It dropped down to an intraday low of 3.1% on Oct. 2. It has been rising in fits and spurts since.

The low yield for the 10-year note since the 2008 market crash was 2.53% on March 19, 2009, just after the stock market bottomed. Investors around the world had flocked to the safety of Treasury securities.

The 10-year yield ended 2009 at 3.84% and dropped to 3.61% in early March before starting to move higher partly because of weak demand at new auctions of the notes and partly because of continued signs of economic growth.

Yields typically rise and prices fall when the economy improves because investors will pull money out of safe, government-backed bonds and opt for riskier investments, like stocks, that have the potential for bigger returns.

The pressure on the yield may increase this week. The Treasury is scheduled to sell $21 billion in 10-year notes on Wednesday.

That's part of three sales this week. On Tuesday, $40 billion in 3-year Treasurys will be sold. On Thursday, $13 billion in 30-year bonds will be sold.
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