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Interest Rate Rise Unsettles Stock Investors; Dow Falls 425 Points

Trader Edward Curran (right) works on the floor of the New York Stock Exchange on Monday. As Treasury yields topped 3 percent on Tuesday, the Dow Jones industrial average tumbled.
Trader Edward Curran (right) works on the floor of the New York Stock Exchange on Monday. As Treasury yields topped 3 percent on Tuesday, the Dow Jones industrial average tumbled.

Updated at 4:19 p.m. ET

Interest rates reached a milestone Tuesday and the stock market frowned.

Tuesday morning, for the first time in four years, the rate on the 10-year U.S. government note topped 3 percent. The bond market move contributed to a sharp sell-off in stocks, as investors wondered whether the long-running bull market might be at a pivot point.

The Dow Jones industrial average swung more than 750 points in the trading day. The key stock index closed down 425 points, or about 1.7 percent. The S&P 500 index lost 1.3 percent for the day.

The rate on the benchmark Treasury note is a key metric in determining many consumer and business interest rates. For instance, the recent rise in the 10-year government yields has coincided with an uptick in 30-year mortgage rates.

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The 3 percent rate level sends a number of crosscurrents through the financial markets, both positive and negative.

The rate increase is partly a response to swelling government debt and to rising commodity prices, including oil, which puts upward pressure on inflation, says Brad McMillan, the chief investment officer at Commonwealth Financial Network.

The rate move also gives stock investors worries that the higher yields make bonds a more attractive investment, undermining stock prices, he says. "So investors who might have gone into stocks to try and get their target return now have the choice of going into bonds," McMillan says.

But he says the increase in interest rates back toward more normal levels also suggests investors have more confidence the economy is likely to continue to grow for some time.

"In many respects the fact that interest rates are now moving back into a normal range is not a sign of trouble. It's a sign of success," McMillan says. "I mean, this is exactly where we've wanted to get to since the [financial] crisis — back to a more normal environment."

Even with the 10-year note's move to the 3 percent level, interest rates remain historically low for this point in an economic expansion.

The Federal Reserve has been trying to move rates higher. But the effort has been slowed by stubbornly quiescent inflation, which has remained below the central bank's target level. The higher 10-year yield suggests inflation may be finally headed toward the Fed's target.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

John Ydstie
John Ydstie has covered the economy, Wall Street, and the Federal Reserve at NPR for nearly three decades. Over the years, NPR has also employed Ydstie's reporting skills to cover major stories like the aftermath of Sept. 11, Hurricane Katrina, the Jack Abramoff lobbying scandal, and the implementation of the Affordable Care Act. He was a lead reporter in NPR's coverage of the global financial crisis and the Great Recession, as well as the network's coverage of President Trump's economic policies. Ydstie has also been a guest host on the NPR news programs Morning Edition, All Things Considered, and Weekend Edition. Ydstie stepped back from full-time reporting in late 2018, but plans to continue to contribute to NPR through part-time assignments and work on special projects.