Higher U.S. Treasury Yields to provide further boost to the greenback

"A Federal Reserve that is raising rates to prevent the US economy from overheating is constraining the policy options of countries where financial conditions are tightening and trade tensions intensifying".

The extended bull run in USA equities is now flowing over into yields for the US government debt space as the benchmark 10-year Treasury note yield reached a seven-year high, reaching past the 3.2% mark before settling to its current level of 3.189 as of 12:30 p.m. ET.

US stock futures pointed to a lower open for Wall Street on Thursday after robust economic data and optimistic views from the Federal Reserve pushed government bond yields to multi-year highs, while curbing the appetite for stocks globally.

Financials, up 0.65 per cent, were one of the few bright spots on Wall Street. Banks and industrial and energy companies, which have struggled for most of 2018, changed place and finished with strong gains.

"That sense of the market's rising discomfort about inflation risks leads me to expect the wage inflation reading within the US nonfarm payrolls on Friday will be critical to the current sell-off", wrote Brian Daingerfield, macro strategist at NatWest Markets.

While chatter about the yield on 10-year USA government debt might not capture the attention of investors like a 500-point swoon in the Dow Jones industrial average would, the movement of this key interest rate is critical because it is the borrowing rate that many other financial assets key off.

"It's so unusual to see these kinds of dramatic moves in the U.S. Treasury market without there being some kind of Big Bang event", said Nixon, of Northern Trust. So any increase in the yield filters through the financial system.

The report pushed longer-dated U.S. Treasury yields higher.

And with talk of plenty more United States interest rate hikes growing louder, it put all the more focus on the USA jobs data later. Intel lost 1.1 percent to $47.63 and Netflix lost 2.78 percent to $353.62. So the rise in the 10-year note, which boosts rates on fixed-rate mortgages, acts as a double whammy.

The 30-year Treasury bond reached a four-year high of 3.424 per cent, up 7 basis points from late Thursday.

"It all has to do with interest rates going up".

The technology sector .SPLRCT sank 1.2 percent, dropping for the second day in a row. That's up from roughly 4 percent a year ago and within striking distance of 5 percent, a level last seen in February 2011.

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Rising bonds yields make stocks less attractive, especially those of high-dividend paying companies such as real estate and utilities.

When yields rise abnormally, it is considered negative for both equities and bonds, as risk appetite and growth expectations are too high to counter the rising bond yields.

"Now that's being reversed, so all these overpriced valuations are coming down and we're seeing the markets drop as interest rates are being normalized. and high beta names like tech sector will take the greatest hit".

"The follow-through on the Treasury rates today, actually the follow-through worldwide on Treasuries, has a big part to do with this", said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago.

Vanessa Coleman

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