The 10-year U.S. Treasury yield rose above 3% for the first time since January 2014, snapping out of a months-long trading range amid an onslaught of supply and a Federal Reserve intent on boosting interest rates.
"It's a big psychological level that has held for quite some time and is a level that global investors are focusing on for direction," Justin Lederer, an interest-rate strategist at Cantor Fitzgerald, said before the level was breached. "Once the dust settles, do we hold above that level and continue to head higher in rates, or does the market hold in?"
Investors including Jeffrey Gundlach at DoubleLine Capital and Scott Minerd at Guggenheim Partners have highlighted the 3% 10-year yield as a critical level for the bond market. It only exceeded it briefly in 2013 and January 2014, toward the end of the bond-market wipeout known as the "taper tantrum."
The yield rose as high as 2.95% in February, before retreating into a range for the past two months. But the prospect of a deluge of new government debt has weighed on the $14.9 trillion Treasuries market. It climbed as high as 3.0014% on Tuesday.
The U.S. budget deficit will surpass $1 trillion by 2020, two years sooner than previously estimated, the Congressional Budget Office said this month. At the same time, the Fed is trimming its balance sheet, meaning the amount of net new debt is poised to surge in the years ahead. Treasury has asked primary dealers to give forecasts for America's borrowing needs over the coming three fiscal years, ahead of the next quarterly refunding on May 2.
Yields were already heading higher at the start of 2018 amid Fed rate hikes, and policymakers have shown no signs of slowing their tightening even with U.S. stock markets fluctuating in recent months.
The increase in longer-term Treasury yields interrupts a relentless flattening of the U.S. yield curve seen in recent months. Central bankers expressed concern this month that the curve was headed toward inversion, a phenomenon that has historically served as a harbinger of recession.
Fed officials' most recent forecasts are for two additional rate increases in 2018. Traders are pricing in slightly more than that.