At 4.332%, the 10-year Treasury yield's at its highest in 16 years. That represents a risk-free, long-duration asset with relatively high returns, weighing on the stock market. The logic is: Why should traders invest in stocks that may not return as much, or just slightly more, when there's an asset class that guarantees a 4% return?
As Rupert Thompson, chief economist at Kingswood Group, told CNBC,"Cash is now yielding 5% in the States, short-dated bonds are yielding 5% plus, so equities for the first time in a long time have actually got some real competition." Typically, stocks — if they do well — tend to return more than a risk-free asset, precisely because it isn't certain stocks will rise. That's called the equity risk premium, a return that's supposed to compensate stock investors for the chance that they might lose money. But, as, the premium is below 1% now. Historically, it's been between 2% and 4%. In other words, stocks are looking much less attractive than Treasurys.
Another potential issue that could crop up with high Treasury yields is that it could make the Federal Reserve's job tougher. Apollo's chief economist Torsten Slok warned that"long rates moving up is indeed a bit more challenging, in terms of getting the economy to that soft landing.
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