Stock Markets Sink, Suggesting Global Rout Will Go On
10 February, 2018, 09:49 | Author: Teresa Adams
Treasury yields moved higher on the day.
Similarly, between May 2003 and June 2006, a 177 bps surge in the UST 10-year yield failed to deter United States equities from notching up 32 per cent gain.
Britain's 10-year yield climbed eight basis points to 1.634 percent, the highest in more than 21 months on the biggest surge in more than five weeks.
"A big down day like Monday doesn't just go away".
Now let us look at the trailing market valuations (P/E) and bond yields. U.S. 10-year Treasury yields climbed above 2.8% this week, the highest since early 2014. Jobless claims are released Thursday morning at 8:30 a.m. ET, but there's no major data until CPI and retail sales data next Wednesday.
When the macro-economic situation deteriorates, investors seek more return on bonds to compensate for the risk involved.
Yields in the belly of the curve are down about 10 basis points. "Now they are saying we will take out the steroids, because it could have side-effects", said Nilesh Shah, MD at Kotak AMC. The unemployment rate was at a near 17-year low of 4.1%. Traders were bored out of their minds for much of 2017, when Treasury yields fluctuated within the tightest range in a half-century.
"You could get into a little bit of circular logic here, as you hand leadership back and forth".
Nevertheless, experts are sticking with the mantra that bonds will be safer than stocks and that investors can continue to count on them as a stabilizing force for their portfolios.
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"There's going to be an interplay, a bit of push and pull between the rates market and equity market", said Mark Cabana, head of US short rate strategy at Bank of America Merrill Lynch. The pullback came amid another spurt higher in Treasury bond yields, a focal point for investors concerned that the Fed may accelerate rate hikes if inflation rises suddenly.
The Schwab U.S. Dividend Equity ETF (SCHD.K), one of the biggest exchange traded funds providing exposure to dividend "aristocrats" - stocks which have 25-year histories of annual dividend raises - is up about 9 percent, outperforming the broader market slightly.
"It's just the latest log on the fire", said Schumacher. This week's Treasury auctions have underwhelmed, raising the prospect that the debt selloff could steepen. Bond yields are rising as the Federal Reserve trims its U.S. bond holdings. The Treasury offers $26 billion 3-year notes Tuesday. "They won't be able to provide that nice predictability and certainty that they provided ever since they started the rate hikes a few years ago". As the thinking goes, higher interest rates will lead to tighter financial conditions, constricting the flow of capital, reducing the demand for equities.
"The cause of this correction is the ostensibly withdrawal of liquidity by central bankers, and consequently rising interest rates". If someone has a bad night's sleep, it's going to affect other people.
"We continue to argue that accelerating inflation, robust growth outlook and expansive financial conditions facilitate continued Fed rate hikes (we now expect four this year) and together with an increasing bond supply speaks in favor of higher USA rates", said Lina Fransson, fixed income strategist at SEB in Stockholm, in a note. Both industries are capital-intensive, requiring frequent loan rollovers and bond issues, so higher borrowing costs have outsized effects on bottom line profits.
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