Bond yields at a critical level means more than meets the eye

As the U.S. 10-year Treasury yield rose to its highest level in more than three years on Friday, most people were focused on the 2.6 percent level, or its highs during both 2016 and 2017. On a technical basis, a move above that level would give it a key "higher high."

However, investors should consider that this level carries importance on a much longer-term basis.

A move above 2.6 percent would also take the 10-year Treasury yield above its trend-line going all the way back to the mid-1980s. Therefore, since there is no real significant resistance above 2.6 percent until you get to 3 percent, any breakout in rates could lead to a quick spike higher. Such a move would have implications for the broader marketplace.

Impact on corporations

One question swirling is whether rising interest rates would create a headwind for equities. However, we also have to worry about what higher rates will signify for corporations. A lot of corporate debt will be maturing over the next two years, and the federal government will have to issue more debt to pay for the new tax package.

If this all occurs while rates are rising, which of course means bond prices are moving in the opposite direction, we could surely see a very sloppy bond market over the next year or two. This, in turn, could create problems for corporations' long-term planning, as well as their profit margins.

Positioning for higher rates

Essentially, we've spent 35 years watching yields decline, so investing in long-term bonds has proved quite profitable. However, if rates are about to head higher for an extended period of time, investors may want to consider shortening up the maturities in their bond portfolios.

If they have shorter maturities, investors will be able to reinvest their money at higher rates over time and not get locked into today's particularly low rates for long-dated Treasury notes.

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