Last week, the yield on the US 10-year Treasury hit 2.94 per cent, the highest level at the end of 2018. This is also a big jump from the level of about 1.6% at the beginning of the year. This is significant because the yield on the 10-year Treasury is considered the benchmark for various mortgages and lending rates.

The conflict between Russia and Ukraine has exacerbated soaring inflation, amid fears that it could hurt consumer demand and drag down economic growth. In addition, there are fears that the Fed's plan to curb rapid price rises by sharply raising funds rates and generally tightening monetary policy could also plunge the economy into recession.

As a result, investors have been selling bonds, pushing yields higher because of the inverse relationship between the two. So what impact will it have on the market if interest rates reach 3%?

Loans and mortgages

One consequence of higher yields is higher borrowing costs for debt such as consumer loans and mortgages.

Whitney Sweeney, an investment strategist at Schroeder, says students who receive federal loans will feel the impact of higher 10-year yields on college loans in the coming academic year.

"interest rates are set by Congress, which approved the margin for the May 10-year bond auction," she said, but stressed that interest rates on existing federal student loans are currently zero as a result of epidemic mitigation measures. "

In addition, private variable-rate student loans are expected to rise as yields on 10-year Treasuries climb, Sweeney said.

Mortgage rates tend to move in line with 10-year Treasury yields, Sweeney said. "We have seen a sharp rise in mortgage rates since the beginning of this year."

Bond

At the same time, Antoine Bouvet, senior interest rate strategist at ING, said higher interest rates on government bonds also meant higher returns on savings invested in fixed-income securities.

He added: "it also means that it is easier for pension funds to invest in future pension payments."

However, when it comes to investing in equities, Bouvet said higher bond interest rates could pose more challenges to the industry of companies that tend to hold more bonds. This is related to technology companies and is part of the reason for the recent increase in volatility in the industry.

Similarly, Sweeney points out that when the yield is close to 00:00, investors have no choice but to invest in riskier assets such as stocks to earn a return.

But with 10-year Treasury yields close to 3 per cent, cash and bonds have become "more attractive options because you can get higher returns without taking too much risk."

Short-term Treasuries are particularly likely to be more attractive given that the market has priced in big interest rate hikes, Sweeney said.

Stock

Zach Griffiths, a senior macro strategist at Wells Fargo & Co, believes that when considering investing in stocks, it is also important to understand what rising returns mean for a company's future cash flow.

One way to value stocks, he says, is to predict the level of free cash flow that companies are expected to generate. This is achieved by using the discount rate, which is an interest rate determined by the yield on treasury bonds. Discounting back to the current cash flow level gives the intrinsic value of the company.

"when these future cash flows are used to discount these future cash flows back to lower current interest rates, the present value of these cash flows (that is, the intrinsic value of the company) will be higher than when interest rates are high, because of the time value of the currency," Griffiths said.

However, Griffiths said the stock market generally resisted the uncertainty caused by rising inflation, geopolitical tensions and a tougher tone of Fed policy.

Griffiths also stressed that the 3 per cent yield on 10-year Treasuries was largely a "psychological level" because it did not represent a significant rise from current interest rates. He said Wells Fargo & Co expected the yield on the 10-year bond to exceed 3% by the end of the year and did not rule out the possibility of hitting 3.5% or 3.75%, but stressed that this was not the "basic situation" of the company.