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The U.S. benchmark 10-year Treasury yield on Monday hit 3% for the first time since December 2018, a psychological milestone that could have significant implications for other financial markets.

The 10-year yield, which rises when bond prices fall, is influential in setting the tone in bond markets worldwide, including for Canada, where the equivalent government bond rose to its highest yield Monday since 2011.

It’s an important barometer for loan rates and other financial instruments, and a higher yield can be negative for stock markets given that it means investors could become motivated to shift money into bonds to take advantage of the higher income payouts that come with little risk.

That dynamic could be seen in Canadian stocks Monday, where high yield real estate investment trusts were among the market’s biggest decliners and kept the TSX in the red by the close despite a late rally on Wall Street.

“The biggest question among investors is: What is the high in rates? Because if you look at it from a long-term perspective, 3% in the 10-year is actually starting to look attractive,” said Gennadiy Goldberg, senior rates strategist at TD Securities in New York.

But “even though rates are attractive, they can be even more attractive tomorrow. A lot of investors are sidelined because of this enormous volatility and this fear that if rates continue rising at least in the near term that is sure to inflict more pain,” he added.

The U.S. 10-year has surged the last two months as the bond market prepared for the Federal Reserve to start reducing its balance sheet, which ballooned to nearly US$9 trillion as the central bank bought bonds during the pandemic.

The Fed, at the close on Wednesday of its two-day policy meeting, is expected to announce a hike in the fed funds target rate by 50 basis points to 0.75%-1.00%, as well as reveal its balance sheet plan. Some Fed officials have said that the balance sheet run-off may start next month, at the latest.

Fed funds futures, which track short-term rate expectations, have priced in at least three 50 basis-point increases this year.

U.S. benchmark 10-year yields touched a peak of 3.01% on Monday, and by late afternoon were up 10 basis points at 2.9905%. The Canadian 10-year yield rose to as high as 2.960%.

Equity markets globally were under pressure Monday after a PMI report from China showed factory activity contracting for the second straight month as widespread COVID-19 shutdowns disrupted production and supply chains.

The S&P/TSX Composite Index ended down 69.78 points, or 0.3%, at 20,692.22, with the real estate sector losing nearly 4%.

Still, the TSX clawed back much of its decline after touching its lowest intraday level since Feb. 24 at 20,456.80. Since the start of the year, the commodity-linked market has fallen 2.5%, which is much less than some other major global benchmarks, including the S&P 500.

The utilities sector fell 1.1% on Monday, extending its pullback from a record high last month, while industrials ended 0.8% lower.

The materials group, which includes precious and base metals miners and fertilizer companies, lost 0.6%. Gold was down 1.8% at about $1,861 per ounce.

In the U.S., investors bought into technology names in the last hour of trading amid bets they had been overly beaten down.

The Dow Jones Industrial Average rose 0.26%, the S&P 500 gained 0.57%, and the Nasdaq Composite added 1.63%.

“The market is faced with a number of challenges and there’s not a lot of conviction one way or the other,” said Robert Pavlik, senior portfolio manager at Dakota Wealth in Fairfield, Connecticut.

“It’s becoming very reminiscent of the early ‘70s,” Pavlik added. “We’ve hit 3% on the 10-year (Treasury yield), interest rates are going up, there’s a war going on, the economy is slowing down. All we need is Richard Nixon to come out of the ground.”

Of the 11 S&P 500 sectors, communications services was the biggest advancer of the six indexes that gained. Real estate led decliners.

“We’re at a point in the market now where so much of it, across various sectors, is beaten down,” said Sylvia Jablonski, chief investment officer of Defiance ETF.

“I think the market has priced in what the Fed will be able to do, so my sense - as someone who likes to look for long-term opportunities - is that this is the land of opportunity right now.”

Jablonski pointed to megacap technology names, which stand to remain key parts of the economy for years to come, as being “on sale.”

High-growth stocks such as tech have been pummeled this year as a result of traders adjusting for the higher interest-rate environment, with losses accentuated in recent days by a number of disappointing earnings reports.

However, Facebook parent Meta Platforms Inc climbed 5.3% on Monday after falling 9.8% last month. Nvidia Corp also jumped 5.3%, while Microsoft Corp gained 2.5%, after sharp declines in April.

After spending much of the day in the red, Tesla Inc , Amazon.com Inc and Apple Inc all ended between 0.2% and 3.7% higher.

Apple had been weighed down for much of Monday as the iPhone maker faced a possible hefty fine after EU antitrust regulators charged it with restricting rivals’ access to its technology used for mobile wallets.

Pfizer Inc fell 1.5% after a large trial found its COVID-19 oral antiviral treatment Paxlovid was not effective at preventing coronavirus infections in people living with someone infected with the virus.

Activision Blizzard climbed 3.3% after Warren Buffett said Berkshire Hathaway Inc has taken a 9.5% stake in the “Call of Duty” game maker.

Spirit Airlines slid 9.4% after the ultra low-cost carrier rejected JetBlue Airways Corp’s $33-per-share takeover offer, saying it had a low likelihood of winning approval from government regulators.

By comparison, JetBlue ended 2.6% higher, regaining ground lost during a midday wobble that had wiped out initial gains.

Volume on U.S. exchanges was 13.22 billion shares, compared with the 11.87 billion average for the full session over the last 20 trading days. The S&P 500 posted 1 new 52-week high and 52 new lows; the Nasdaq Composite recorded 26 new highs and 503 new lows.

Reuters, Globe staff

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