Pros eye stress points in rate hike cycle

could spook investment pros: 1 10-year Treasury top

ping 3%: The Fed has a big influence over rates on all kinds of consumer and corporate debt, thanks to its control of its funds rate — the interest banks charge each other for overnight loans. But investors in international markets drive longer-term rates, such as those on the 10-year Treasury note. Stocks often get knocked off track, and seem less attractive, when yields on longer-term bonds go up. In general, higher rates eventually slow the economy, dent consumer spending and raise loan costs for borrowers.

Currently, the 10-year Treasury yields around 2.50%, nearly double its 52-week low of 1.32% in July, but lower than the 2.64% rate after the December hike.

Market pros say a threshold they’re watching is a yield of 3% or more, a level not seen in more than three years. A rise to 3.25% to 3.5% would cause more jitters.

“A move above 3% and beyond too quickly would risk unsettling the market,” says Thorne Perkin, president of Papmarkou Wellner Asset Management.

At that level, stocks could suffer harm and bigger price swings could happen more often. Normally, when the market becomes more volatile, prices tend to fall. The 3% threshold would be a sign the 30-plus-year period of declining bond yields, which dates to the 1980s, is ending — and higher rates are here to stay, says Axel Merk, manager of the Merk Funds. Low rates, he argues, have led to artificially high stock prices, and shares are vulnerable to sharply higher yields. 2 Fed speeding up hikes: Yellen said Wednesday the Fed was still on track for three rate increases this year. But market pros say stocks could get upended if the Fed ups its count.

For the Fed to hike more, inflation for consumers (now hovering just below 2%) would have to spike above 2% faster than expected. The economy also would have to undergo a growth spurt powered by President’s Trump’s plans to slash corporate taxes and spend heavily on infrastructure.

“The stock market would react negatively to any whiff of four hikes,” says Scott Wren, senior global equity strategist for Wells Fargo Investment Institute. For now, the economy isn’t strong enough for the Fed to get too aggressive, he says. First-quarter economic growth, or GDP, now is tracking at 1.4%, down from a 2% estimate March 1, Barclays says. A recent drop in oil prices and stillsmall wage gains for workers mean there’s no immediate

threat of surging inflation.

The economy must be strong enough to handle sharply higher borrowing costs, Perkin adds: “Too much too soon could cause the economy to become strained and risk falling into recession.”

Another potential shock: the Fed surprises by hiking rates by a bigger-than-expected amount. 3 Economy picking up too

fast: Too much of a good thing could spur the Fed to get more aggressive than investors want. The risk is if the Fed has to transition to a much faster pace of rate increases to keep the economy from overheating. This could occur if the fiscal stimulus introduced by Trump, at a time when the economy is near full employment, provides a big lift to growth and causes inflation to rise faster than expected. That would spark fear that the Fed might be too late in keeping inflation at bay, which could force it to hike rates more than planned.

“If they’re raising rates because the economy is getting better and corporate earnings are strong, that’s fine,” says John Canally, chief economic strategist at LPL Financial. “The risk comes in when you introduce fiscal stimulus into the situation.”

What the market won’t like is if the Fed “is behind” where it needs to be on its rate hike schedule to keep in inflation in check.