Inflation data pushed 10-year Treasury yield above 4%. How much higher can rates go?

 Rates across the entire Treasury market all go above 4%

Signs of continued U.S. labor market strength plus persistent inflation out of Europe were all it took on Thursday for bond investors to push yields up toward new milestones on rising interest-rate expectations.The 10-year Treasury yield rose meaningfully above 4%, the highest level since November and one of the highest in more than a decade. BMO Capital Markets strategists Ian Lyngen and Ben Jeffery said the benchmark rate is near the top of what they see as a 100-125 basis point trading range centered around 3.5% -- meaning the rate could go as high as 4.5% or 4.75% at some point if bond-selling momentum continues. Yields and debt prices move opposite each other.

For now, Lyngen and Jeffery are putting the 10-year yield's 4.241%-4.335% intraday peaks reached late last year back on the map.

March marks the first anniversary of the first Federal Reserve rate hike of the current tightening cycle, and the outlook for inflation across developed markets has only gotten murkier since.

U.S. data on Thursday showed that weekly initial jobless claims stayed below 200,000 for the seventh week in a row at the end of February, a sign of continued labor-market strength. Meanwhile, inflation hasn't come off nearly as much as expected in either the U.S. or the eurozone, with the latter recording an annual CPI inflation rate of 8.5% for last month. Together, that's adding up to rising yields and interest-rate expectations, which continue to pressure stocks. Yields across the entire Treasury market, including the 30-year rate BX:TMUBMUSD30Y, are all now above 4%.As with almost everything in financial markets, bond trading is a two-way street: Yields tend to back up each time inflation fears prompt investors to sell off bonds. Those rates then start to ease down again as a fresh pool of investors, attracted by higher yields, jump back in to buy fixed income at more appealing returns than they might get elsewhere, such as in stocks. "We don't believe the 10-year can stay over 4% for a long period of time without affecting the economy, and we expect to see an increase in unemployment as we move through the year," said Rhys Williams, chief strategist at Spouting Rock Asset Management, which oversees $2.3 billion in assets from Bryn Mawr, Pa.

"We wouldn't get too negative on stocks and bonds, because we think both stocks and bonds will rally hard at the first sign that PCE inflation is slowing and unemployment is increasing, and we think that is likely in the next three months," Williams said.

The 10-year yield, which hovered around 4.07% in New York trading, hasn't ended the New York session above 4% since Nov. 9, 2022, though it came within less than 1 basis point of doing so on Wednesday. Prior to October to November of last year, the yield hasn't consistently traded above 4% since 2007-2008.Fed policy makers have delivered 450 basis points worth of tightening in the past year -- taking their benchmark rate target to 4.5% and 4.75% from almost zero. On Thursday, fed funds futures traders briefly boosted their expectations for a 5.5%-plus interest rate by November, and the policy-sensitive 2-year rate BX:TMUBMUSD02Y inched closer to 5% or the highest level in more than a decade. Meanwhile, U.S. stocks turned mostly higher Thursday afternoon, a reversal from the pattern seen during the first trading session of March. Over the last month, "inflation expectations have spiked back and 2yr and 5yr U.S. breakevens are now at 7-month and 4-month highs, respectively," said Deutsche Bank's Jim Reid, in a note. "To be frank, the inflation call is now tougher than it was in 2020-2022," describing it as a "sticky and messy outlook." "Further ahead, structural forces are becoming inflationary, including those relating to deglobalisation and demographics," Reid wrote. "But in the near term, inflation will likely be sticky until the monetary overhang has been eradicated and the U.S. recession we expect hits later this year. After that, we could fall sharply given current monetary trends and the lag of policy, before the structural forces re-emerge again in the next cycle."

https://www.morningstar.com/news/marketwatch/20230302656/inflation-data-pushed-the-10-year-treasury-yield-above-4-how-much-higher-can-interest-rates-go