Although yields on U.S Treasury 10-year notes (TNX) closed at 2.58% on Friday, longer-term charts suggest that a break above the recent resistance high at 2.737% could occur soon. If a move above 2.737% were to emerge, a push up toward the 3.40% area could result over the next few months or so.
Clearly, the implantation of the much-anticipated taper could trigger the initial break above 2.737%, even though it is widely expected. A further decline in the value of dollar index (DXY) or possible hints of another credit downgrade on U.S. treasuries (with a debt ceiling battle coming soon) could add to this higher-rate scenario.
Nevertheless, a number of Fed officials clearly sent a message to investors last week that the taper is coming, but a tightening is not. Bond traders might respond to this collective missive by establishing new yield curve steepening positions. Still, bank loan officers as well as would-be borrowers may well welcome this kind of maneuver.
A steeper yield curve, while detrimental to mortgage borrows over the short-run, could trigger an increase in commercial and industrial loan formation. Since wider profit margins accompany steeper yield curves (with banks borrowing low yielding short-term money, and lending at ever increasing long-term rates), a built-in incentive to increase lending activity might be ignited. Such a scenario would be helpful to small-to-medium sized businesses and could help them in their hiring and expansion plans.
Of course, these types of outcomes will take some time to develop, but the odds are that they will unfold and they will develop. In the long-run, that will be helpful to economic growth and equity prices alike.