Bond yields are close to a major psychological level that could really spook the stock market

Published Tue, Feb 28 202311:22 AM ESTUpdated Tue, Feb 28 202311:41 AM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

The benchmark 10-year Treasury yield is hovering close to a key level that strategists say could give stock investors a fright. The 10-year Treasury yield broke through resistance in recent sessions and is now a hair below the important 4% level. Yields, which move opposite price, have been rising through February after sliding in January. The yield was at 3.94% in late morning trading. For stocks, a move to 4% could create more volatility. US10Y 6M line 10y "When yields come in, the market seems to like that. When they rally, the equity market doesn't like that. It's very much an inverse relationship between yields and the stock market," said Katie Stockton, founder of Fairlead Strategies. "Which is why we had outperformance in January in tech because yields were pulling back." The 10-year is especially important since stocks — particularly growth and technology shares — react to its movements. But it is also important to investor psyche for other reasons. It is the key rate that influences mortgages and other consumer and business loans. "With the short-term breakout, the indicators point higher, and now we have a shift in our intermediate term trending gauges," said Stockton. "That does suggest 4%, which is not a resistance level, but it's certainly a psychological level...It impacts people for nothing more than it's a round number. It's a perception. Human nature will hear that 4 and it sounds different to them." Scott Redler, partner with T3Live.com, said when the yield crosses the 4% mark, he expects to see computer-related selling in stocks. "You've got to look at the 10-year. You've got to look at TLT," he said. TLT is the iShares 20+ Year Treasury Bond ETF. "Yields are driving the tape. The street came to the reality that rates are staying higher for longer." TLT 6M line tlt When the 10-year crossed resistance at 3.82% on Feb. 16, the breakout in the yield began and the stock market sell-off accelerated, Stockton said. She now expects the 10-year to rise above 4% and reach the next target of 4.34%, the high from October. After the October high, Stockton said the next big level on the 10-year yield chart would be about 5.25%, a resistance level established in 2006. But Stockton said she is not now calling for the yield to reach that level. "We're seeing 4.34 as the potential upward boundary of a trading range," she said. As for stocks, the market could continue to be rocky as it adjusts to the upward move in rates. Technology and growth shares are particularly vulnerable, since they are priced on future earnings and a higher cost of borrowing makes those earnings seem less valuable. .SPX 1Y line s and p "We've been in an active sequence to the downside [in stocks] since Feb. 16, when the S & P broke below 4,100. That was your active signal to reduce risk," said Redler. "Since then, we've had a controlled pullback but by no means has it fallen apart."