The rates trade is back in focus for stock investors

Wall Street is concerned that interest rate trading could push stock prices down again.

The 10-year Treasury yield (^TNX) has risen about 25 basis points in the past 10 days alone. It’s currently hovering around 4.29%, not far from a level Morgan Stanley Chief Investment Officer Mike Wilson recently said could be important for stock investors.

“We view the 10-year Treasury yield of 4.35% as an important technical level to watch for signs of increasing interest rate sensitivity in equities,” Wilson said in a note to clients on Sunday.

According to Bank of America’s March Global Fund Manager Survey released Tuesday, 40% of managers expect bond yields to fall, down from 62% in December. This is the lowest expected yield decline in the last year.

Mr. Wilson noted that large-cap stocks have recently become less sensitive to interest rates. “Small-cap stocks are likely to be more interest rate sensitive to rising yields than large-cap stocks,” he said.

Wilson said the strength of this large-cap stock has shown up in the recent market expansion, pushing the S&P 500 (^GSPC) near all-time highs even as the market has scaled back bets that the Federal Reserve will cut interest rates. It is pointed out that it is maintained. The Russell 2000 Small Cap Index (^RUT) continues to lag, while sectors such as Materials (XLB) have recently gained.

The key for the stock market is whether interest rate uncertainty persists. A number of strategists told Yahoo Finance that for the stock market rally to fully extend, investors will need to have more confidence in the Federal Reserve’s interest rate plans. The central bank is expected to announce its next policy decision later on Wednesday.

While the market is not expecting news of a rate cut, investors will get some clarity on the Fed’s thinking through a summary of its economic outlook.

The release includes a “dot plot” that illustrates policymakers’ expectations of where interest rates are likely to go in the future. In December, a dot plot showed that Fed officials expected three rate cuts this year. But economists are warning that they may expect the Fed to cut rates less sharply after some better-than-expected inflation reports and no signs of economic slowdown.

“A possible reversal of expected rate cuts would be perceived as hawkish by markets, putting upward pressure on interest rates and policy.” [US dollar]all else being equal,” Bank of America’s interest rate strategy team wrote in a research note Wednesday.

Christy Akrian, senior investment and portfolio solutions strategist at BlackRock, told Yahoo Finance Live that some of the expected stock price reaction from the Fed’s move to lower interest rates is likely “priced in.” he said. But outside of large-cap stocks, there could still be some pain.

“It could be a problem for the lower quality parts of the market,” Akrian said. “So if you look at small-cap stocks and highly leveraged companies, I think they have struggled this year and may continue to struggle.”