Markets have been fretting about the 10-year Treasury yield potentially hitting and breaking 3 percent, but according to one economist this is nonsensical.
Many market players believe that a 3 percent level on the 10-year U.S. paper is a massive problem for equities, but above all, for the global economy. Firstly, because it means higher interest rates — so when companies try to borrow money, that money will become more expensive and as a result they will have less room to give returns to investors.
Secondly, the 10-year note is used as a benchmark for many financial instruments, including mortgages — so people with credit from banks will have to pay more interest and thus have less money to spend elsewhere.
And lastly, if rates start hiking significantly, they will be breaking away from the trend registered in the past few years — the 10-year paper hasn’t hit 3 percent since 2014.
But according to Paul Donovan, global economist at UBS Wealth Management, the 3 percent threshold is just a number.
“Bond dealers are simple people; they like simple round numbers and they’re going for 3 percent because it’s there,” Donovan told CNBC’s Squawk Box Europe Tuesday.
“Economically, does it matter? No it doesn’t. Is there any difference between 3 percent and 2.98 (percent)? No, there is not. Is there any difference between 3 and 2.7? No, not really. Economically, this is just noise in the background,” he said.
On Monday, some money managers told CNBC that 3 percent is a “psychological” number that guides markets.
“Three percent is a psychological level… Rates were never able to break that trend-line durably… since the early ’80s,” Francesco Filia, chief executive of Fasanara Capital, told CNBC via email. “To break it neatly and clearly would reignite fears that (the) rates rise is durable.”
A sustained period of rate increases, for the reasons mentioned above, is nonetheless seen by many others as a problem for markets and a potential precursor of the next crisis.