<p>The US 10-year treasury yield hit an intraday high of 2.9957%. This is just shy of the psychological barrier of 3%.</p><p> </p><p><b><span style="text-decoration: underline;">Maginot Line of 3%</span></b><b><span style="text-decoration: underline;"></span></b></p><p>The Maginot Line is associated with the line of heavy fortifications to protect France in the 1930s.  In the treasury market, 3% level is recognised as the Maginot line for the US 10-year yield, where strong resistance lies.</p><p></p><p>A break of the 3% level will put the 10-year yields on a firm footing to climb higher. Above 3%, the key levels to watch are as follows:</p><p>i) 3.052% - 2014 high</p><p>ii) 3.221% - 2011 July high</p><p>iii) 3.766% - 2011 high</p><p> </p><p><b><span style="text-decoration: underline;">The most hawkish of them all</span></b></p><p>Among the leading central banks, the US Fed is the most hawkish. This could provide impetus for the US bond yields to go higher. As highlighted in previous discussion, the US Fed March meeting minutes unveiled a hawkish bias and could hike interest rate in June ( A minute closer to June rate hike: <a href="media/our-media-coverage/a-minute-closer-to-june-rate-hike/">https://castle-familyoffice.sg/media/our-media-coverage/a-minute-closer-to-june-rate-hike/</a> ). On the other hand, the rhetoric from ECB is dovish with President Draghi acknowledging the slowdown in the Eurozone area. In Japan, BOJ recognised that inflation is far from the 2% target and would continue its monetary stimulus until it achieves the goal.</p><p><strong> <span style="text-decoration: underline;">Impact on the stock market</span></strong></p><p>The climb of bond yields could add pressure on the stock market. Prior to 2018, the market regime is in a Goldilocks phase with solid economic growth and tepid inflation. The S&amp;P 500 index delivered return that is closed to 22% in a tranquil 2017. Bond market behaved calmly with yields trading in a tight range between 2.01 and 2.63%.</p><p> </p><p>This year, volatility has picked up as market adjust to a new phase from <b>Goldilocks</b> to a <b>Reflation</b> regime. Economic growth remains strong but inflation has also picked up. The uptick in inflation has resulted in bond yields to climb higher. A slow rise in interest rate is easily absorbed by the stock market whereby S&amp;P 500 Index consolidates within a range between a 2560 to 2790. However, a steeper-than-expected rise in interest rate above 3.1% could lead to a market correction with S&amp;P 500 Index breaking below 2550.</p><p> </p><p><b>Edmund Chan, CFA</b></p>