Rising bond yields have unnerved the stock market, and they could continue to be a source of volatility in coming weeks, as the Treasury market faces the challenges of growing U.S. Treasury debt supply and a ballooning U.S. budget deficit.
The 10-year Treasury yield climbed to a new seven-year high of 3.26 percent early Tuesday, after trading below 3 percent just a month ago. In that time, the S&P 500 has lost 1.2 percent. The 10-year on Tuesday later backed down from its highs, but it has now punctured 3.25 percent, a key level a number of strategists had targeted for year-end.
"I think we're in no man's land. I think it could go to 3.50 or 3.75 on really good news, good economic news, good global news, or if trade tensions go down," said George Goncalves, head of fixed income strategy at Nomura. Next up for the market is inflation data — producer price inflation data Wednesday and the consumer price index Thursday.
Election talk is also affecting the rates market, which has been expecting Democrats to take the House and the GOP to hold the Senate. Goncalves said if there were a surprise Republican sweep of Congress, that could also cause yields to rise, as the GOP would be expected to consider more tax cuts and therefore larger deficits.