10-Year Treasury at the Brink of Sparking Risk Aversion

If you believe a particular projection by Goldman Sachs, then the 10-year Treasury market has given investors a nail-biter. It had closed on Monday with a 4.28% yield, the estimation by the bank had to do with a 4.30% target, and intraday trading had bested that figure. The close on Tuesday was down to 4.28% — still only two basis points from the figure.

About a week ago, economic analysis website ZeroHedge posted on X a snippet from a Goldman Sachs report: “Historically, a 2 SD move in US 10 yr yield, equivalent to around 60 bps today (3yr lookback), over a month is when equity market returns are below avg. Given we’ve moved 46bps MTD, this simple rule of thumb argues that a move towards 4.30% is where things would get tricky for stocks.”

Or, in regular English, a two-standard-deviation move in the yield of the 10-year Treasury — about equivalent to 60 basis points — over a month when equity market returns are below average roughly translates to a 4.30% 10-year yield is the point at which there is an inflection point that can affect many parts of the economy.

One of those is commercial real estate lending. The 10-year is a stand-in for the so-called risk-free interest rate. Assuming that the U.S. economy won’t collapse and default, this is, practically speaking, the risk-free rate. While there is no yield curve inversion presently, the 2-year yield has also been on the rise, closing on Monday at 4.12%, a value not seen for almost three months.

Many lenders, concerned about risk, already seek refreshed valuations on legacy loans. They don’t want to be caught lending on inadequate property value coverage that would put those loans underwater. An ongoing upward move could keep longer-term CRE loan rates high.

If that wasn’t enough, this is a week of multiple critical economic reports that could combine with bond prices to affect interest rate cuts.

“If the economic data this week (especially the jobs report) is strong, then expectations for a November rate cut will fall, potentially hard, and that could inject some volatility into markets. ” Tom Essaye, founder of Sevens Report Research, told CNBC.

“Bottom line, Goldilocks data is important this week to keep rate cut expectations stable,” Essaye added.

Various Federal Reserve officials, particularly chair Jerome Powell, have said that if conditions change for the worse, the central bank is ready to slow plans to bring down interest rates.