Tag: 10yeartreasury

The Nasdaq just fell into a correction. Now what?

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The Nasdaq Composite Index fell into its 70th correction in history on Wednesday, as surging long-term Treasury yields increased borrowing costs and weighed on stocks.

The interest rate sensitive Nasdaq
COMP
barreled higher in the year’s first half, in part on optimism about a potential Federal Reserve pivot away from rate hikes to fight inflation, but stocks have been under fire in recent months as the Fed dialed up its message that interest rates could will stay higher for longer.

The tech-heavy equity index fell 2.4% on Wednesday to close below the 12,922.216 threshold, marking a drop of a least 10% from its prior peak, which was set in mid-July at 14,358.02, according to Dow Jones Market Data.

That met the common definition for a correction in an asset’s value and is the Nasdaq’s 70th close in correction territory since the index’s inception in February 1971.

Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said the sharp rise in long-term Treasury yields has spooked investors, especially those in highflying, high-growth technology stocks where rising rates can be particularly corrosive.

Pavlik likened the dynamic to the spending power of a lottery winner hitting a jackpot when rates are at 2% versus someone who wins when rates are closer to 10%.

He also expects the 10-year Treasury yield
BX:TMUBMUSD10Y,
which rose to 4.952% Wednesday, to top out at 5.25% to 5.5% and likely complicate any recovery for the Nasdaq.

In the past 20 corrections for the Nasdaq, it took an average of three months for performance to improve, with index then gaining 14.4% on average a year later, according to Dow Jones Industrial Average.

Nasdaq corrections are usually followed by a bounce in a few months

Dow Jones Market Data

The damage on Wednesday was most acute in shares of highflying technology stocks, including Alphabet Inc.
GOOG,
-9.60%
as shares skid 9.5%, after it reported earnings that were overshadowed by downbeat performance for its Google Cloud business. Spillover also hit shares of rival cloud computing giant Amazon.com Inc.,
AMZN,
-5.58%
with its shares slumping 5.6%

“You’re feeling the pressure in some big-name stocks,” Pavlik said. “But this too will, at some point, end. But concerns about the Fed are still in the forefront of everybody’s minds.”

The Nasdaq was still up 22.5% on the year through Wednesday, while the Dow Jones Industrial Average
DJIA
was down 0.3% and the S&P 500 index
SPX
was up 9% in 2023, according to FactSet.

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October 25, 2023
Homes are expensive right now, but these mortgage bonds look cheap

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U.S. homes may be wildly unaffordable for first-time buyers, but mortgage bonds backed by those same properties could be dirt cheap.

Shocks from the Federal Reserve’s dramatic rate increases have walloped the $8.9 trillion agency mortgage-bond market, the main artery of U.S. housing finance for almost the past two decades.

Spreads, or compensation for investors, have hit historically wide levels, even through the sector is underpinned by home loans that adhere to the stricter government standards set in the wake of the subprime-mortgage crisis.

Bond prices also have tumbled, sinking from a peak above 106 cents on the dollar to below 98, despite guarantees that mean investors will be fully repaid at 100 cents on the dollar.

From $106 to $98 cents, agency mortgage-bond prices are falling.

Bloomberg, Goldman Sachs Global Investment Research

“It’s really, really struggled,” Nick Childs, portfolio manager at Janus Henderson Investors, said of the agency mortgage-bond market during a Thursday talk on the firm’s fixed-income outlook.

Yet Childs and other investors also see big opportunities brewing. While mortgage bonds have gotten cheaper with the sector’s two anchor investors on the sidelines, the stalled housing market should breed scarcity in the bonds, which could help lift the sector out of a roughly two-year slump.

Prices have tumbled since rate shocks hit, but also since the Fed continued winding down its large footprint in the sector by letting bonds it accumulated to help shore up the economy roll off its balance sheet.

Banks awash in underwater securities have pulled back too. The repricing of similar bonds helped hasten the collapse of Silicon Valley Bank in March.

“Banks have been not only absent, but selling,” said Childs, who helps oversee the Janus Henderson Mortgage-Backed Securities exchange-traded fund
JMBS,
an actively managed $2 billion fund focused on highly rated securities with minimal credit risk.

“But we’re moving into an environment where supply continues to dwindle,” he said, given anemic refinancing activity and the dearth of new home loans being originated since 30-year fixed mortgage rates topped 7%.

The bulk of all U.S. mortgage bonds created in the past two decades have come from housing giants Freddie Mac
FMCC,
+0.66%,
Fannie Mae
FNMA,
+1.09%
and Ginnie Mae, with government guarantees, making the sector akin to the $25 trillion Treasury market. But unlike investors in Treasurys, investors in mortgage bonds also earn a spread, or extra compensation above the risk-free rate, to help offset its biggest risk: early repayments.

While homeowners typically take out 30-year loans, most also refinanced during the pandemic rush to lock in ultralow rates, instead of continuing to make three decades of payments on more expensive mortgages. If someone refinances, sells or defaults on a home, it leads to repayment uncertainty for bond investors.

“To put this another way, the biggest risk to mortgages is now off the table, yet spreads are at or near historic wides,” said Sam Dunlap, chief investment officer, Angel Oak Capital Advisors, in a new client note.

That spread is now far above the long-term average, topping levels offered by relatively low-risk investment-grade corporate bonds.

Agency mortgage bonds are offering far more spread that investment-grade corporate bonds. But these mortgage bonds will fully repay if borrowers default.

Janus Henderson Investors

Agency mortgage bonds typically are included in low-risk bond funds and can be found in exchange-traded funds. While they have been hard hit by the sharp selloff in long-dated Treasury bonds
BX:TMUBMUSD10Y

BX:TMUBMUSD30Y,
there has also been hope that the worst of the storm could be nearly over.

Goldman Sachs credit analysts recently said they favored the sector but warned in a weekly client note that it still faces “high rate volatility and a dearth of institutional demand.”

As evidence of the U.S. bond selloff, the popular iShares 20+ Year Treasury Bond ETF
TLT
recently sank to its lowest level in more than a decade. It also was on pace for a negative 10% total return on the year so far, according to FactSet. Janus Henderson’s JMBS ETF was on pace for a negative 2.7% total return on the year through Friday.

“Frankly, why they fit portfolios so well is that because the government backs agency mortgages, there is no credit risk,” Childs said. “So if a borrower defaults, you get par back on that. It just comes through as a typical payment.”

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October 13, 2023
What’s missing for investors in new $60 billion corporate borrowing blitz

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Another big corporate borrowing blitz to kick off September has gotten under way, but this one isn’t looking like the rest.

Instead, the flurry of new bond issues shows how the Federal Reserve’s higher interest rate environment has begun to seep in a year later, by making major companies far more hesitant to tap credit for longer stretches.

“The…

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September 7, 2023
Fed rate hikes can end now that U.S. job gains are the size of an economy like Australia’s, says BlackRock

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The Federal Reserve can probably end its inflation fight now that the U.S. labor market is cooling after generating a historic 26 million jobs in roughly the past three years, according to BlackRock’s Rick Rieder.

“In fact, 26 million jobs is like adding an economy the size of Australia or Taiwan (including every man, woman, and child),” said Rieder, BlackRock’s chief investment officer in global fixed income, in emailed commentary following Friday’s monthly jobs report for August.

The August nonfarm-payrolls report showed the U.S. adding 187,000 jobs, slightly more than had been forecast, but also pointing to an uptick in the unemployment rate to 3.8% from 3.5%.

“Remarkably, 22 million people were hired between May 2020 and April 2022, and 11 million were added to the workforce from June 2021 to May 2023, as the economy has opened up massive amounts of roles for fulfillment,” said Rieder.

He expects wage pressures to ease, he said, and thinks the “economy may now have fulfilled many of its needs,” which should make the Fed feel more confident in “the permanence of lower levels of inflation,” so that it can slow or stop its interest-rate rises by year-end.

Hiring in the U.S. has slowed, except in education and in healthcare services, when looking at private payrolls based on a three-month moving average.

Payrolls are slowing in many sectors, expect education and healthcare

Bureau of Labor Statistics, BlackRock

The Fed has already raised interest rates in July to a 5.25%-to-5.5% range, a 22-year high, with traders in federal-funds futures on Friday pricing in only about a 7% chance of a Fed rate hike in September and favoring no hike again at the central bank’s November policy meeting.

Rieder of BlackRock, one of the world’s largest asset managers with $2.7 trillion in assets under management, said he thinks a Fed pause or outright end to rate hikes could calm markets, even if the Fed, as BlackRock expects, keeps rates high for a time.

U.S. closed mostly higher Friday ahead of the Labor Day holiday weekend, with the Dow Jones Industrial Average
DJIA
up 0.3%, the S&P 500 index
SPX
up 0.2% and the Nasdaq Composite Index
COMP
0.02% lower, according to FactSet.

The 10-year Treasury yield
BX:TMUBMUSD10Y
was at 4.173%, after hitting its highest level since 2007 in late August, adding to volatility that has wiped out earlier yearly gains in the roughly $25 trillion Treasury market.

Read on: This hadn’t happened on the U.S. Treasury market in 250 years. Now it has.

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September 1, 2023
Labor Day is just a ‘milestone’ in the marathon to get workers back to the office

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The U.S. Labor Day holiday will mark another milestone in the marathon to bring workers back to the office, but it won’t be a quick fix for landlords, according to Thomas LaSalvia, head of commercial real estate economics at Moody’s Analytics.

Employers from Facebook parent Meta
META,
+0.27%
to Goldman Sachs
GS,
-0.26%
recently laid out mandates for staff to return to the office more frequently, starting this fall, including the big one — the federal government.

“A lot of companies are saying that after Labor Day, ‘We expect more out of you,” LaSalvia said, referring to days in the office. Still, office attendance, he argues, likely only stages a fuller comeback if a job or promotion is on the line.

Amazon.com Inc.’s
AMZN,
+2.18%
Chief Executive Andy Jassy has been trying to drive home the point by warning staff to return at least three days a week, or face the consequences.

That could prove difficult, with Friday’s U.S. jobs report for August expected to show U.S. unemployment at a scant 3.5%, near the lowest levels since the late 1960s, even if hiring has been slowing. The labor market, so far, appears unfazed by the Federal Reserve’s benchmark rate reaching a 22-year high.

It has been a different story for landlords facing a roughly 19% vacancy rate nationally and piles of debt coming due, especially for owners of older Class B and C office buildings with a bleak outlook or properties in cities with wobbling business centers.

See: San Francisco’s office market erases all gains since 2017 as prices sag nationally

As with shopping malls, LaSalvia said it’s largely a problem of oversupply, with many office properties at risk of becoming obsolete as tenants flock to better buildings and locations staging a rebirth. The trend can be traced in leasing data since 2021, with Class A properties in central business districts (blue line) showing a big advantage over less desirable buildings in the heart of cities (orange line).

Return to office isn’t going to save the entire office property market

Moody’s Analytics

“Little by little, we are finding the office isn’t dead,” LaSalvia said, but he also sees more promise in neighborhoods with a new purpose, those catering to hybrid work and communities that bring people together.

Another way to look at the trend is through rents. Manhattan’s Penn Station submarket, with its estimated $13 billion overhaul and neighboring Hudson Yards development, has seen asking rents jump 32% to $74.87 a square foot in the second quarter since the fourth quarter of 2019, according to Moody’s Analytics. That compares with a 2% bump in asking rents in downtown New York City to $61.39 a square foot for the same period.

The push for a return to the office also doesn’t mean a repeat of prepandemic ways. Goldman Sachs analysts estimate that part-time remote work in the U.S. has stabilized around 20%-25%, in a late August report, but that’s still up from 2.6% before the 2020 lockdowns.

Furthermore, the persistence of remote work will likely add another 171 million square feet of vacant U.S. office space through 2029, a period that also will see tenants’ long-term leases expire and many companies opting for less space. The additional vacancies would roughly translate to 57% of Los Angeles roughly 300 million square feet of office space sitting empty.

“The fundamental reason why we had offices in the first place have not completely disintegrated,” LaSalvia said. “But for some of those Class B and C offices, the writing was on the wall before the pandemic.”

U.S. stocks were mixed Thursday, but headed for losses in a tough August for stocks, with the S&P 500 index
SPX
off about 1.5% for the month, the Dow Jones Industrial Average
DJIA
2.1% lower and the Nasdaq Composite
COMP
down 2% in August, according to FactSet.

Related: Some employers mandate etiquette classes as returning office workers walk barefoot, burp loudly and microwave fish

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August 31, 2023
Treasury market returns are negative again. Why this time for bonds looks different than 2022.

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Yearly returns in the Treasury market slipped into negative territory this week as the market sold off on signs that the Federal Reserve may need to keep rates high for a while to contain inflation.

While negative returns might stir bad memories of last year’s shocking losses for bonds, stocks and nearly everything else, investors holding Treasury debt issued at 2023’s higher yields might want to sit back and take stock.

“This is the top thing we hear,” said Ryan Murphy, director of fixed-income business development at Capital Group, of evaporating returns in what’s been a tough August. “You saw the worst bond market in 40 years last year. Investors, they are tired, and feel beaten up.”

Murphy’s message to clients is this: “In bonds, you earn the money over time.” And those dwindling bond returns since January? “Approach it with a deep breath, and know this is going to work out in the end.”

Capital Group’s laid-back style and lack of “a star CEO” earned it recognition by Institutional Investor in March as “a new bond leader” without a king, in large part because it attracted $100 billion in funds over the past five years, or twice the total of its peers.

Recent volatility in interest rates again zapped yearly gains in many bond funds, as Fed officials continued to warn that a roaring labor market and robust spending could keep inflation from receding to the central bank’s 2% annual target.

The spike in long-term bond yields makes older, lower-yielding securities look comparatively less attractive. That’s reflected in the yearly return on a key Bloomberg U.S. government bond and note index, which turned negative for the first time since March (see chart), when several regional banks failed, stoking fears of a broader banking crisis.

Returns on U.S. government bonds turn negative for the year.

FactSet

However, a look back at August 2022 shows the 10-year Treasury yield starting around 2.6%, according to FactSet.

By contrast, Treasury bill yields
BX:TMUBMUSD06M
neared 5.5% on Thursday, or “north of anything we’ve seen over the past 15 years,” Murphy said. And for investors looking to lock in longer-term yields, the 10-year Treasury rate
BX:TMUBMUSD10Y
touched 4.307% on Thursday, its highest level since November 2007, according to Dow Jones Market Data.

See: How BlackRock’s Rick Rieder is steering his active fixed-income ETF as bond funds struggle

“It’s becoming more expensive for the government and companies to finance debt because of the rapid climb in rates,” Murphy said of the drag of higher long-term interest rates.

On the flip side, it’s also been one of the best stretches for lenders and bond investors in terms of getting paid to act as creditors since the 2007-2008 global financial crisis, but without a U.S. recession — or at least not yet.

What’s also different from last year is that the Fed already jacked up interest rates to a 22-year high of 5.25%-5.5% in July, and has signaled it’s likely nearly finished with hikes in this cycle.

Record cash on the sidelines

Murphy pointed to a mountain of cash on the sidelines, in the form of assets in money-market funds, as another potential stabilizer for markets.

Assets in money-market funds hit a record $5.57 trillion for the week ending Wednesday, according to data from the Investment Company Institute.

“What’s really interesting is that there’s been two bursts of investors going into money-market funds. There was a big shift right at the onset of COVID, and another burst over the past 12-18 months since the beginning of the rate-hiking cycle,” Murphy said.

Looking back to 2008, he pointed to a similar buildup in money-market assets, and a roughly $1.1 trillion wall of cash subsequently leaving the sector, as financial assets began to recover in the wake of the financial crisis.

“What we did see, while not all of it, was a healthy amount went back into fixed-income in the following years,” Murphy said.

Stocks closed lower Thursday and were headed for another week of losses, with the Dow Jones Industrial Average
DJIA
2.3% lower on the week so far, the S&P 500 index
SPX
down 2.1% and the Nasdaq Composite Index off 2.4%, according to FactSet.

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August 17, 2023