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- Borrowing costs are rising as implied by the benchmark 10-year Treasury yield, which hit its highest since January 2020.
- Tech stocks fell as the yield pushed past 1.6%, drawing the Nasdaq Composite down 1% during Wednesday's trading session.
- The Fed would likely spring into action if the 10-year yield were to hit 2% by the end of March, says one analyst.
- See more stories on Insider's business page.
Borrowing costs as tracked by the 10-year Treasury note yield rose to their highest in 14 months on Wednesday, with investors pricing in expectations of hotter inflation while they cut down high-flying growth stocks.
The yield on the benchmark 10-year Treasury note hit 1.67%, a level not seen since mid-January 2020, before the COVID-19 outbreak was declared a pandemic and before it had accelerated in the US. Yields rise as bond prices drop.
The yield has quickly pushed higher since the start of 2021, from around 0.9%, bolstered by improvement in the world's largest economy after it and other economies worldwide fell into recession last year.
"What the market is trying to price in is a much more optimistic Fed … that is likely to remain committed to providing more accommodation into this economic recovery," Ed Moya, senior market analyst at Oanda, told Insider on Wednesday before the release of the Federal Reserve's economic projections and monetary policy decision at 2 p.m. Eastern.
Along with growth, investors also expect inflation to increase and for the Fed to begin raising interest rates after they slashed them to near zero in March 2020 in response to the health crisis.
The step-up in the 10-year yield, which is tied to a range of lending programs including mortgages, has spurred a pullback in growth stocks, notably large-cap tech stocks, and a rotation into cyclical stocks set to benefit when an economy improves.
Those moves showed up Wednesday with the tech-concentrated Nasdaq Composite falling by 1.1% and the S&P 500's information technology sector losing 1.3%. Shares of Apple dropped by 2.2%, Google's parent company Alphabet declined 1.7% and Microsoft gave up 0.8%.
"You're probably going to see that the Fed is still going to be stubborn as far as when that first rate hike is going to happen, but the markets are just going to go ahead and price that in a lot sooner," said Moya.
There are market expectations that the Fed will begin raising its fed funds target rate in 2023 from the current range of zero to 0.25%. Meanwhile, more fund managers now consider higher-than-expected inflation would be the biggest danger to the market, replacing COVID-19 as the main risk, according to a Bank of America survey for March.
The US economy is expected to recover further with the US government circulating COVID-19 vaccines from three companies -- Pfizer and its partner BioNTech, Moderna, and Johnson & Johnson -- and with about 111 million people already vaccinated.
"Also, it doesn't hurt when you have almost $2 trillion in [fiscal] stimulus get done since your last policy meeting," said Moya, adding that "the economy is likely to run hot for a little bit."
A steady grind higher of the 10-year yield "is completely healthy," said Moya.
"But if this pace continues [and] by the end of the month we're above 2%, that is going to be somewhat disruptive to the economic recovery," which would likely prompt the Fed to take action, he said. The Fed's tools include buying more Treasury bonds, he added.