Treasury
yields
shot
up
last
year,
and
investors
flocked
to
allocating
to
cash
which
have
yielded
around
5%
or
even
more.
As
yields
rose,
investors
put
their
cash
into
cash
instruments
such
as
short-term
certificates
of
deposit,
money-market
mutual
funds
and
short-term
U.S
Treasury
bills.
Those
yields
have
since
dropped,
and
Wall
Street
are
widely
expecting
them
to
go
fall
even
further,
leading
investors
to
exit
cash
and
get
into
other
income-generating
assets.
But
recent
stronger-than-expected
economic
data
on
consumer
and
producer
prices
has
raised
the
possibility
that
the
U.S.
Federal
Reserve
will
cut
interest
rates
later
rather
than
sooner.
The
10-year
Treasury
rose
above
4.3%
after
the
release
of
the
economic
data
,
and
was
around
4.2%
as
of
Wednesday
—
up
from
below
4%
in
January.
At
the
top
of
investors’
minds
are
the
direction
of
interest
rates
and
the
question
of
how
it
will
affect
yields
and
the
stock
market.
Morgan
Stanley
Investment
Management’s
Jim
Caron
believes
the
10-year
Treasury
yield
is
very
likely
to
hover
between
5%
and
5.5%.
Caron,
who
is
chief
investment
officer
at
its
Portfolio
Solutions
Group,
explained
that
historically,
10-year
Treasury
yields
are
“usually
a
good
match”
for
nominal
gross
domestic
product.
“If
we’re
running
3%
inflation
and
2%
potential
growth,
or
even
…
slightly
higher
potential
growth
at
with
2.5%,
you
could
see
a
10-year
Treasury
around
5%,
5.5%,”
he
told
CNBC’s
”
Street
Signs
Asia
”
on
Wednesday.
Meanwhile,
deficits
in
the
U.S.
are
“going
to
be
a
problem
at
some
point
in
time”
and
10-year
yields
will
likely
“gravitate
higher.”
“I
think
now
we’re
getting
back
to
a
normal
spot
where
QE
is
going
away
and
quantitative
tightening
is
also
going
to
come
to
an
end
that
we
could
start
to
gravitate
towards
the
nominal
GDP
levels,
which
for
the
US
could
very
easily
be
between
5%
and
5.5%
and
that’s
over
the
longer
term,”
Caron
said.
Of
course,
if
the
economy
goes
through
a
major
slowdown,
yields
will
fall,
he
said.
“But
if
you
think
of
the
natural
gravitation,
nominal
GDP
levels
around
5%,
5.5%,
is
a
reasonable
level
to
think
of
where
10-year
Treasury
yields
could
go,”
Caron
concluded.
How
rising
yields
affect
stocks
But
are
rising
yields
bad
for
stocks,
as
commonly
thought?
Not
necessarily,
according
to
Caron.
“The
age
old
question
of
whether
or
not
rising
bond
yields
will
push
equities
lower
is
met
with
the
age-old
answer:
it
depends
why
yields
are
rising,”
he
said.
“If
yields
are
rising
because
the
economy
is
running
hot,
and
data
and
labor
markets
are
stronger,
the
rising
yields
need
not
negatively
affect
stocks.”
Caron
concedes
that
could
be
“overly
simplistic”
because
of
“many
other
variables
to
consider.”
He
outlined
three
scenarios
for
the
10-year
yield
and
their
impact
on
policy
and
stocks:
The
line
at
which
the
level
of
yield
starts
to
have
a
negative
impact
on
asset
prices
is
at
4.5%
to
4.6%
for
the
10-year.
“Because
this
is
a
level
that
is
still
consistent
with
the
Fed
cutting
2-3
times
in
2024.
For
the
10y
to
rise
beyond
that
yield
level,
one
may
start
to
build
in
the
possibility
of
no
cuts,
or
worse,
another
rate
hike.
This
could
tip
the
scales
in
favor
of
interest
rates
mattering
more
to
weigh
on
equity
valuations,”
he
said.
The
“Goldilocks
zone”
—
in
which
monetary
policy
is
looser
and
the
risk
of
rate
hikes
is
low
—
is
when
the
10-year
is
at
4%
to
4.5%
or
4.6%,
Caron
said.
He
said
he’ll
start
to
get
worried
if
the
yield
falls
below
4%.
“I
start
to
get
worried
that
something
bad
is
brewing
and
whatever
necessitates
rate
cuts
would
almost
certainly
be
a
risk
off
event,”
he
said.
