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10-Year yield tops 1.6% following February jobs report

Yahoo FInance's Brian Cheung joined Yahoo Finance Live to break down how February's jobs report is impacting the 10-year treasury note yield.

Video Transcript

SEANA SMITH: Rising rates is really the story of the market this week, or last couple of weeks, I should say. Higher yields putting pressure on those growth stock names, big tech. We saw a lot of pressure in some of those names this week. We want to help-- I guess have a better understanding of all that. And for that, we want to bring in Brian Cheung, who has been closely following this story for us. And Brian, we talked about Jay Powell's comments yesterday clearly spooking investors a little bit. But talk to us just about some of the dynamics at play in the market and why we're seeing the various reactions that we have been over the last few trading days.

BRIAN CHEUNG: Yeah, absolutely. And it looks like, to anyone that's watching the stock market on the surface, that things have kind of reversed. There was a lot of greed in the equities market. But I pointed this out yesterday. There's still a very strange dynamic going on between the risk on, risk off dynamic that you usually tend to see between equities and bond markets. So when you look, for example, at the green across the major equities indexes, usually, that type of risk on when people have the appetite to want to buy into stocks, you see bond market yields go up on US treasuries. That's not the case as we see in the 10-year.

Now if you're looking at a day-to-day comparison, it does look like bond yields are going up. But consider that we open the market session today with a 10-year yield going up as high as 160 basis points. Actually, since the market's been rallying across the day, we've seen bond yields come down about five basis points. So, again, bond yields going down as the equities market goes up-- some very interesting dynamics there.

One explanation might be that people yesterday with that sell-off were basically doing profit-taking, deciding that they wanted to cash out at those high valuations because maybe the Fed punchbowl at some point will get pulled away. So they pulled out of particularly bio and tech stocks specifically, which might explain why maybe the NASDAQ itself has also been lagging, despite that market rally today. But very interesting dynamics. Things are still a little off, in my opinion.

ADAM SHAPIRO: Brian, we keep hearing people talk about yield curve control. Can you put on your professor hat and school us on specifically what that would look like if the Fed were to go there?

BRIAN CHEUNG: Yeah, absolutely. Well, let's, first of all, take a step back and think about the context of what we're talking about here. So I have a chart here that shows you the 10-year yield, and how that's really steepened the yield curve. Now, again, for people that are unfamiliar with the yield curve, it's essentially plotting out the different types of yields from short-term duration, as short as three months, to as long as 10 years, or rather, 30 years.

And you can see what's the difference between the yield curve as of yesterday, the snapshot as of March 4th, and the purple line, which is a snapshot as of two months ago, January 4th. You could see the short-term end of everything. Everything's still pinned down to near zero. That's because the Fed slashed short-term interest rates. But the 10-year has really rallied up just in the last two months.

Now, everyone knows that the bond yields generally serve as a proxy for interest rates, so this means more expensive 30-year mortgages. This means more expensive 10-year business loans. So at what point do those borrowing costs get so high that the Fed maybe wants to do something? Well, one option would be yield curve control. They just commit to buying a certain amount of treasuries until yields go below a certain level.

And in fact, the Reserve Bank of Australia tried something like this with their three-year bonds. They've been buying those bonds at a pinned target of 10 basis points on their three-year. But I want to show you a second chart which shows you the differences between where the 10-year on the Australian bond has gone and the 10-year United States Treasury. Very interesting to watch here.

So, again, the Reserve Bank of Australia is buying medium term bond yields, trying to pin those yields down. But over the last few months, you can see the Australian 10-year has actually risen even faster than the US 10-year has in terms of basis points. So we're talking about longer term borrowing costs going up-- the same story in Australia, even with the yield curve control policy. So that's not to suggest that yield curve control policy doesn't work, but it's a cautionary tale for the Fed to say, hey, in this type of environment, there are many other factors at play in the bond market, which means you should be weary of maybe pulling out a new tool like this.

SEANA SMITH: All right, Brian Cheung, thanks, as always, for breaking that down for us.