Why rising bond yields causing pain to stocks

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This pushed the S&P 500 up 5.9%, marking its best start to the year since 1987, prior to the recent pull-back. This was against the backdrop of a strongly rising trend thanks to very positive economic conditions and President Trump's business friendly policies.

The S&P 500 has fallen 7.8 percent since January 26, when it set its latest record high.

7-year -10 bps @ 2.665%. Investors should bear in mind that almost a quarter of government bonds are still negative yielding and more than 90% of bond globally still yield less than a 10 year Treasury, so the demand for yield should naturally act as a constrain on surging yield levels.

The CBoe Volatility index.VIX closed at its highest since August 2015.

US payrolls report on Friday indicated that wages are growing at their fastest pace in over eight years, adding to the apprehensions that both inflation and interest rates are more likely to increase earlier than imagined. That could be a problem as these investors look at that statement and realize that they have done really well for a long time, but perhaps it is time that they look toward safer investments, especially now that the yield on those safer investments has increased.

The news sent benchmark 10-year Treasury yields - a key guide to interest rates globally - to fresh four-year highs and raised concerns that monetary policy will tighten more than thought.

We had a look at this issue last week in Higher global inflation and higher global bond yields. "The pullback is likely to be just an overdue correction, with say a 10 percent or so fall, rather than a severe bear market - providing the rise in bond yields is not too abrupt and recession is not imminent in the US with profits continuing to rise".

The tug of war "is just getting underway", Guggenheim's Minerd said in a Twitter post.

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Shares sank more than 1 percent from Tokyo to Sydney, while S&P 500 Index futures were 0.6 percent lower.

Monday's historic slump in United States stocks had something to do with this. Japanese government bond yields fell to their lowest in nearly a month at 0.065 percent in European trade.

Gold has resistance at the last major high around $1,375, and the high before that, at around $1,428, is the other strong point of resistance.

"The selloff is continuing this morning and futures point to a lower opening as investors track rising yields", Peter Cardillo, a chief market economist in a client note. "Although markets are finally slowly starting to fully price in expectations of interest rate increases from the US Federal Reserve (they have been telegraphing as many as four for 2018), we don't think central bankers will risk moving too quickly and endangering the recovery they have painstakingly coached for the last decade".

Falls associated with recessions are in red. At some point, the foreign investors will not see the merits for staying in the NZ bond market and will sell out. Consumer spending is up, as are wages (which could offset higher consumer borrowing rates). However, the previous loose/loose monetary conditions have well and truly ended in the USA and are now ending in Europe. The Fed Funds rates of 1.25 - 1.5% is still well below nominal growth of just over 4%.

The tricky thing about predicting a stampede out of bonds is that fixed income is, by definition, different from other asset classes. Hard for that to happen when we've had the QE free lunch for so long, and now the large tax cuts to corporations. Therefore, we do not need to offer such a big risk premium to come into NZ bonds.

As a result, earnings growth is likely to remain strong in the year ahead. Average hourly earnings increased by 2.9% in the year to January, up from an upwardly revised 2.7% growth in the previous month and the fastest rate of increase since June 2009. Surely that must be bad for profits?