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Tag: U.S. 10 Year Treasury Note

  • U.S. stocks have had a great year in 2023 — but these numbers tell a different story

    U.S. stocks have had a great year in 2023 — but these numbers tell a different story

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    U.S. stocks have risen sharply in 2023, with a small number of technology companies driving an ever-increasing share of the stock-market gains. 

    While the 11.7% year-to-date gains for the large-cap benchmark S&P 500 index
    SPX
    show 2023 has been a “good year” for stocks, that hardly tells the whole story, said Jonathan Krinsky, the technical strategist at BTIG. 

    The U.S. stock market has seen the median return for shares in the S&P 500 index rise merely 1.1% in 2023, which is “a different planet” compared with their median gain of 16.2% in 2014, when the benchmark index recorded a yearly advance of 11.4%, Krinsky said in a Sunday note (see chart below).

    SOURCE: BTIG ANALYSIS, BLOOMBERG

    The Russell 3000
    RUA
    — a barometer that represents approximately 98% of the American equities — had a median return of negative 2.2% this year, but the index has gained 11.3% year to date, wrote Krinsky, citing BTIG and Bloomberg data. In 2014, the median return for the Russell 3000 was 6.9%, and it recorded a yearly gain of 10.4%.

    Meanwhile, the median year-to-date return for stocks in the S&P 1500, which includes all shares in the S&P 500, S&P 400
    MID
    and S&P 600
    SML
    and covers approximately 90% of U.S. stocks, rose a merely 0.1% versus the index’s 11.2% advance this year, said Krinsky. The S&P 1500 recorded a median return of 8.8% in 2014 and was up 10.9%. 

    See: ‘Anxiety’ high as stock market falls, bond yields rise — what investors need to know after S&P 500’s worst month of 2023

    So far in 2023, investors have struggled to brush off a rise in Treasury yields primarily triggered by the Federal Reserve bumping up interest rates and the risk of recession, with hope that the stock-market rally hasn’t run out of steam yet. 

    However, the S&P 500 and the Nasdaq Composite
    COMP
    Friday locked in their worst month of the year, down 4.9% and 5.8%, respectively, according to FactSet data.

    Treasury yields continued to rise on Monday with the yield on the 2-year
    BX:TMUBMUSD02Y
    up 6.4 basis points to 5.110%, while the yield on the 10-year Treasury
    BX:TMUBMUSD10Y
     jumped 11 basis points to 4.682%. The 10-year rate ended at its highest level since Oct. 12, 2007, according to Dow Jones Market Data.

    See: U.S. stock-market seasonality suggests a potential rally in the fourth quarter. Why this time might be different.

    As a result, investors were hoping October and the last quarter of 2023 could bring some relief to the scorching summer selloff they had to endure in markets. Historically, the fourth quarter has been the best quarter for the U.S. stock market, with the S&P 500 index up nearly 80% dating back to 1950 and gaining more than 4% on average, according to data compiled by Carson Group. 

    “It seems to us that a rally [in the fourth quarter] is the consensus view based on the fact that seasonals tend to work that way,” Krinsky said. “While October is a strong month on ‘average’, it has been down ten of the last 30 years, with eight of those years losing 1.77% or more.”

    In other words, when October is good it tends to be really good, but when it’s bad it tends to be quite bad, Krinsky added. 

    U.S. stocks finished mostly higher on Monday with the Dow Jones Industrial Average
    DJIA
    down 0.2%, while the S&P 500 ended flat and the Nasdaq edged up 0.7%, according to FactSet data.

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  • U.S. stocks open mostly lower as Treasury yields jump after Washington averts government shutdown

    U.S. stocks open mostly lower as Treasury yields jump after Washington averts government shutdown

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    U.S. stock indexes opened mostly lower to start the month as Treasury yields resumed their climbs after U.S. legislators were able to reach a temporary agreement that averted a government shutdown. The Dow Jones Industrial Average
    DJIA,
    -0.11%
    dropped 47 points, or 0.1%, to 33,463, while the S&P 500
    SPX,
    +0.24%
    was off 0.1% and the Nasdaq Composite
    COMP,
    +1.06%
    was nearly flat. The U.S. Senate on Saturday night, with mere hours left before a midnight deadline for a federal government shutdown, voted to advance a short-term stopgap funding measure, which was then signed by President Joe Biden into law. The bill keeps the government open for 45 more days, an extended period that lawmakers can use to finalize funding legislation. The yield on the 2-year Treasury
    TMUBMUSD02Y,
    5.115%
    added 8 basis points to 5.113% on Monday morning, while the yield on the 10-year Treasury
    TMUBMUSD10Y,
    4.669%
    rose 7 basis points to 4.645%. Investors awaited a number of Fed speakers, with Fed Chair Jerome Powell and Philadelphia Fed President Patrick Harker expected to make comments at a community event in York, Pennsylvania, at 11 a.m.

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  • How 10-year Treasurys could produce 20% returns, according to UBS

    How 10-year Treasurys could produce 20% returns, according to UBS

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    Carnage in the bond market in September could tee up an opportunity for investors to earn big returns on U.S. government debt in a year.

    Owners of 10-year Treasury
    BX:TMUBMUSD10Y
    notes at recent yields of around 4.5% could reap up to 20% in total returns in a year if the U.S. economy stumbles into a recession, according to UBS Global Wealth Management.

    The key would be for U.S. debt to rally significantly as investors scramble for safety in the roughly $25 trillion treasury market.

    “U.S. yields remain well above long-term equilibrium levels, providing scope for them to fall as the macroeconomic outlook becomes more supportive for bonds,” a team led by Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, wrote in a Friday client note.

    Their base-case call is for the 10-year Treasury yield to fall to 3.5% in 12 months, with it easing back to 4% in an upside scenario for growth, and for the economy’s benchmark rate to tumble as low as 2.75% in a downside scenario of a U.S. recession.

    “That would translate into total returns over the period of 14% in our base case, 10% in our upside economic scenario, and 20% in our downside scenario.”

    See: The market ‘may be overpaying you’ on a 10-year Treasury, says Lloyd Blankfein

    A rally in Treasury debt could help boost funds that track the Treasury market and the broader U.S. bond sector. The popular iShares 20+ Year Treasury Bond ETF
    TLT
    was down 10.9% on the year through Friday, while the iShares Core U.S. Aggregate Bond ETF
    AGG
    was 3% lower, according to FactSet.

    A tug of war has been developing in the Treasury market, with fear gripping investors this week as bond yields spike in the wake of signals last week from the Federal Reserve that interest rates may need to stay higher for longer than many on Wall Street anticipated.

    “Bond vigilantes” unhappy about the U.S. deficit have been demanding higher yields, while households and hedge funds have been piling into Treasury securities since the Fed began raising rates in 2022.

    Much hinges on how painful things get if rates stay high, which would ratchet up borrowing costs for households, companies and the U.S. government as the Fed works to get falling inflation down to its 2% target.

    Hedge-fund billionaire Bill Ackman this week said he thinks Treasury yields are going higher in a hurry, as part of his bet that the 30-year Treasury yield
    BX:TMUBMUSD30Y
    has more room to climb.

    The 10-year Treasury edged lower to 4.572% on Friday, after adding almost 50 basis points in September, which helped the stock market reclaim some lost ground in a dismal month, while the 30-year Treasury yield pulled back to 4.709%, according to FactSet.

    The Dow Jones Industrial Average
    DJIA
    posted a 3.5% decline in September, its biggest monthly loss since February, the S&P 500 index
    SPX
    fell 4.8% and the Nasdaq Composite Index
    COMP
    shed 5.8% for the month.

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  • U.S. stocks end lower, S&P 500 drops third straight week as Fed worries linger

    U.S. stocks end lower, S&P 500 drops third straight week as Fed worries linger

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    U.S. stocks ended modestly lower Friday, with the Dow Jones Industrial Average falling for a fourth consecutive day in its longest daily losing streak since June. The S&P 500 and Nasdaq each logged a third-straight weekly decline as rising bond yields rocked equities in the wake of the Federal Reserve meeting on Wednesday.

    How stock indexes traded

    • The Dow Jones Industrial Average
      DJIA
      fell 106.58 points, or 0.3%, to close at 33,963.84.

    • The S&P 500
      SPX
      shed 9.94 points, or 0.2%, to finish at 4,320.06.

    • The Nasdaq Composite
      COMP
      dropped 12.18 points, or 0.1%, to end at 13,211.81.

    For the week, the Dow fell 1.9%, the S&P 500 dropped 2.9% and the Nasdaq Composite slumped 3.6%. The S&P 500 and Nasdaq each booked their biggest weekly percentage drop since March, according to Dow Jones Market Data.

    What drove markets

    Stocks slipped after two days of selling sparked by the Federal Reserve projecting its policy interest rate would remain above 5% well into next year.

    The notion in markets that the Fed would be cutting rates soon was “offsides,” leading to a “knee-jerk reaction” in bond markets that hurt stocks, said Michael Skordeles, head of U.S. economics at Truist Advisory Services, in a phone interview Friday. In his view, the central bank may cut its benchmark rate just once in the second half of next year, if at all, as inflation remains too high in a “resilient” U.S. economy with a “still fairly strong” labor market.

    Rapidly rising Treasury yields have been blamed for much of the pain in stocks. The yield on the 10-year Treasury note
    BX:TMUBMUSD10Y
    climbed 11.7 basis points this week to 4.438%, dipping on Friday after on Thursday rising to its highest level since October 2007, according to Dow Jones Market Data.

    Senior Fed officials who spoke Friday voiced support for the more aggressive monetary policy path signaled by Fed Chair Jerome Powell on Wednesday.

    Boston Federal Reserve President Susan Collins said rates are likely to stay “higher, and for longer, than previous projections had suggested,” while Fed Gov. Michelle Bowman said it’s possible the Fed could raise rates further to quell inflation. The latest Fed “dot plot,” released following the close of the central bank’s two-day policy meeting on Wednesday, showed senior Fed officials expect to raise rates once more in 2023.

    Meanwhile, the S&P 500 finished Friday logging a third straight week of declines, with consumer-discretionary stocks posting the worst weekly performance among the index’s 11 sectors by dropping more than 6%, according to FactSet data.

    “Markets weakened this week following an extended period of calm, as the hawkish tone adopted by Fed Chair Powell following the FOMC meeting caused the decline,” said Mark Hackett, Nationwide’s chief of investment research, in emailed comments Friday. “Bears have wrestled control of the equity markets from bulls.”

    Economic data on Friday showed some weakness in the U.S. services sector, while manufacturing activity recovered slightly but remained in contraction, according to S&P U.S. purchasing managers indexes.

    Still the U.S. economy has been largely resilient despite a hawkish Fed, with “strong economic growth driving fears of continued inflation pressure,” said Hackett. He also pointed to concerns that a “too strong” economy and “developing clouds” such as strikes, a potential government shutdown, and student loan repayments “will impact consumer activity.”

    Read: Government shutdown: Analysts warn of ‘perhaps a long one lasting into the winter’

    Jamie Cox, managing partner at Richmond, Virginia-based wealth-management firm Harris Financial Group, said by phone on Friday that he’ll become concerned about the impact of a government shutdown on markets if it stretches for longer than a month.

    “I’m only worried if it goes past a month,” said Cox, explaining he expects “little” economic impact if a government shutdown lasts a couple weeks.

    Meanwhile, United Auto Workers President Shawn Fain said Friday that the union is expanding its strike to 38 General Motors Co.
    GM,
    -0.40%
    and Stellantis NV’s
    STLA,
    +0.10%
    auto-parts distribution centers in 20 states, hobbling the two carmakers’ repair network.

    “We’re seeing strike after strike,” which overtime could fuel wage growth that’s already “robust,” said Truist’s Skordeles. That risks adding to inflationary pressures in the economy, he said. And while U.S. inflation has eased “dramatically,” said Skordeles, “it isn’t down to where it needs to be.”

    Companies in focus

    Steve Goldstein contributed to this report.

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  • The Fed’s got inflation dead wrong. That’s why a 2024 recession is likely, says Duke professor.

    The Fed’s got inflation dead wrong. That’s why a 2024 recession is likely, says Duke professor.

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    Campbell Harvey, a Duke University finance professor best known for developing the yield-curve recession indicator, says the Federal Reserve’s read on inflation is out of whack. And, as a result, the likelihood that the U.S. slips into a recession is increasing.

    The big question now is the severity of the economic downturn to come, if the central bank continues unabated on its high-interest-rate path.

    On Wednesday, the Fed, which began raising rates from near zero last year, held them at a range of 5.25% to 5.5%, a 22-year high, in its effort to get inflation under control.

    “The [inflation gauge] that the Fed uses makes no sense whatsoever, and it’s totally disconnected from market conditions,” Harvey told MarketWatch in a phone interview.

    The Fed’s measures of inflation are heavily weighted toward shelter costs, which reflect the rising price of rental and owner-occupied housing. For example, shelter inflation has been running at 7.3% over the past 12 months, and also as of the most recent consumer-price index, for August. Shelter represents around 40% of the core CPI reading.

    Harvey says that’s a problem because shelter’s retreat loosely follows the broader trend lower for headline inflation but at a lag, and the Fed wouldn’t be properly accounting for that lag if it decided to keep its target interest rates restrictively high.

    Separately, MarketWatch’s economics reporter, Jeff Bartash, notes that CPI also fails to capture the millions of Americans who locked in low mortgage rates before or during the pandemic and who are now paying less for housing than they had previously.

    “The Fed is … using inflation, in what I call a false narrative,” Harvey said.

    Opinion: Fed’s ‘golden handcuffs’: Homeowners locked into low mortgage rates don’t want to sell

    Also see: U.S. mortgage rates ‘linger’ over 7%, Freddie Mac says, slowing the housing market further

    Harvey said that if shelter inflation were normalized at around 1% or 1.5%, overall core inflation would measure closer to 1.5% or 2%. In other words, at — or substantially below — the Fed’s 2% target.

    Consumer prices ex-shelter were up 1.9% on a year-over-year basis in August, up from 1% in July, according to the Labor Department.

    The Canadian-born Duke professor says that the Fed risks driving the U.S. economy into recession because it has achieved its goal of taming inflation, which peaked at around 9% in 2022, and isn’t making it clear that its rate-hike cycle is complete.

    “Now, the higher those rates go, the worse [the recession] is,” he said.

    Harvey pioneered the idea that an inverted yield curve is a recession indicator, with the curve’s inversion depicting the yield on three-month Treasurys rising above the rate on the 10-year Treasury note
    BX:TMUBMUSD10Y.
    Longer-term Treasurys typically have higher yields than shorter-term U.S. government debt, and the inversion of that relationship historically has predicted economic contractions.

    Harvey says that that his yield-curve-inversion model has an unblemished track record — 8-out-of-8 — for predicting recessions over the past 70 years. A recent inversion of U.S. yield curves implies that a U.S. recession is still a possibility.

    Opinion: The U.S. could be in a recession and we just don’t know it yet

    Also see: Are markets getting more worried about a recession? Invesco says a Fed pivot is coming.

    On Thursday, the Dow Jones Industrial Average
    DJIA
     fell 1.1%, while the S&P 500
    SPX
    tumbled1.6% and the Nasdaq Composite
    COMP
    slumped 1.8%, marking one of the worst days for stocks in months. 

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  • Why higher oil prices aren’t likely to make it into Fed’s inflation or rate outlook

    Why higher oil prices aren’t likely to make it into Fed’s inflation or rate outlook

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    With the Federal Reserve preparing to release updated inflation and interest-rate forecasts on Wednesday, the proverbial elephant in the room will probably be missing from the equation: The full impact of rising oil prices, according to investors, traders and strategists.

    Oil prices touched fresh 2023 highs on Tuesday and settled above $90 a barrel, a byproduct of this month’s decision by Russia and Saudi Arabia to extend production cuts into year-end. Just a day ago, Mike Wirth, chief executive of Chevron
    CVX,
    -0.01%    ,
    put the prospect of oil crossing $100 a barrel on the map and the price at the gas pump went above $6 a gallon in Southern California — reigniting fears about a revival of inflation.

    It’s too soon to say whether the run-up in energy prices will spill over into the narrower core inflation gauges that the Fed cares most about, TD Securities strategist Gennadiy Goldberg said via phone. As a result, policy makers may look past the impact of higher energy prices on their longer-term inflation and rate outlook Wednesday, he said. Fed officials are hesitant to place too much weight on energy or food as components of inflation, anyway, because of their volatile natures.

    In One Chart: Why crude-oil rally can’t be ignored by investors — or the Fed

    However, some traders are worried that such an omission could be a mistake considering all the other price pressures playing out, such as strikes against the three major U.S. automakers.

    UAW strike: Union sets Friday deadline for further possible strikes

    “Is it a mistake to not factor in oil? I personally think it is, but I’m probably in the minority on that,” said Gang Hu, an inflation trader at New York-based hedge fund WinShore Capital. “The combination of oil and strikes by the United Auto Workers presents a structurally unstable inflation picture.”

    “If the Fed is the one that provides insurance against inflation and is not doing anything, the market will seek inflation protection by itself and it will look like inflation expectations are unanchored. This is the risk,” Hu said via phone.

    Nervousness around the prospect of a higher-for-longer message on rates from the Fed helped send the 2-
    BX:TMUBMUSD02Y
    and 10-year Treasury rates
    BX:TMUBMUSD10Y
    to their highest levels in more than a decade on Tuesday. The ICE U.S. Dollar Index was off by less than 0.1%.

    Read: How Fed’s higher-for-longer theme may play out in Treasurys and the dollar on Wednesday

    U.S. stock indexes
    DXY

    SPX

    COMP
    finished lower on Tuesday, led by a 0.3% drop in Dow industrials.

    Investors and traders are expected to zero in on the part of the Fed’s Summary of Economic Projections that reflects where the fed-funds rate target, currently between 5.25%-5.5%, could go in 2024. As of June, policy makers penciled in the likelihood of four 25-basis-point rate cuts next year after factoring in more tightening this year, and they saw inflation creeping down toward 2% in 2024 and 2025, as well as over the longer run.

    See: Why Fed’s response to this key question could spark 5% stock-market pullback or ‘solid rally’

    Many in financial markets are clinging to the likelihood of no Fed rate hike on Wednesday, and see some possibility of just one more increase in November or December before rate cuts begin in the middle or final half of next year. But inflation traders now foresee seven straight months of 3%-plus readings on the annual headline CPI rate, from September through next March; that’s up from five consecutive months seen as of last Wednesday and complicates the question of where the Fed will go from here.

    “The Fed’s rate decision on Wednesday was already decided a while ago, when officials started to communicate that a pause would be the likely outcome,” said Mark Heppenstall, chief investment officer of Penn Mutual Asset Management in Horsham, Pa., which oversaw $32 billion as of August.

    “On the margin, we might see higher oil prices make a modest impact on rate projections,” he said via phone. However, “it’s too early for the story to change on disinflation and all the progress made so far.”

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  • Why the Fed’s next decisions on rates could lead to a wave of commercial-debt defaults

    Why the Fed’s next decisions on rates could lead to a wave of commercial-debt defaults

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    Getting staff back to the office is only part of the battle.

    Regional banks that went big lending on office properties also face a ticking time bomb of maturing debt that they helped create, particularly if the Federal Reserve holds its policy rate near the current 22-year high well into next year.

    “The area of greatest concerns for banks is office space,” says Tom Collins, senior partner focused on regional banks and credit unions at consulting firm firm West Monroe. Should rates stay high, “borrowers are going to face a tough decision of whether they refinance or default,” he said.

    The fight to bring more staff back to half-empty office buildings comes as an estimated $1 trillion wall of commercial real-estate loans is set to mature through 2024. While tenants haven’t shied away from signing up to pay top rents at trophy buildings, the same can’t be said for the rows of lower-rung properties lining financial districts in big cities.

    See: Labor Day is just a ‘milestone’ in the marathon to get workers back to the office

    The Fed embarks on a two-day policy meeting on Tuesday, with expectations running high for rates to stay steady, giving more time to study the impact of earlier rate increases.

    The central bank’s rate hikes have further complicated matters for landlords, and fresh debt for office buildings no longer looks cheap nor abundant. Regional banks also have been piling back on lending after Silicon Valley Bank and Signature Bank collapsed in March and as deposits fled for yield elsewhere.

    Related: FDIC kicks off $33 billion sale of seized assets from Signature Bank

    Loan volumes from Wall Street similarly have been anemic. This year it has produced slightly more than $10 billion in “conduit,” or multi-borrower, commercial mortgage-backed securities deals through the end of August, the least since 2008, according to Goldman Sachs. Coupons, a proxy for mortgage rates, have climbed above 7%, the highest since the early 2000s.

    “I don’t think this is a wash out here,” Collins said of the threat of more regional bank failures, but he does anticipate pain for lenders heavily exposed to lower quality class B and C office buildings in urban areas.

    Banks can help mitigate the wall of debt coming due by stepping up the pace of loan modifications to help borrowers keep properties, but Collins said he also anticipates lenders will need to increase loan sales, write downs and mergers or acquisitions.

    “There is no doubt there will be private equity and other investors that will be interested in buying some of these loans, taking them off the balance sheets of banks,” Collins said.

    “The obvious question there is at what discount?” he said, adding, “I think investors will wait until things get more dire to try to get a better deal.”

    Another offset to banks’ office exposure has been the relatively stable performance of hotels, industrial and other property types. But Collins said that if rates stay high and the economy falters, those sectors are likely to face challenges as well.

    The 10-year Treasury yield,
    BX:TMUBMUSD10Y
    a benchmark lending rate for the commercial real estate industry, was near 4.32% on Monday, hovering around a 16-year high ahead of the Fed meeting, while the policy-sensitive 2-year Treasury rate
    BX:TMUBMUSD02Y
    was near 5.06%. Stocks
    SPX

    DJIA
    were edging higher.

    Office distress intensified in August, with the special servicing rate of loans in bond deals hitting 7.72%, compared with a 6.67% rate for all property types, according to Trepp, which tracks the commercial mortgage-backed securities market. A year ago, the rate of problem office loans was 3.18%.

    “If I was an investor, I would be patient around this, because values are only going to come down, I would imagine,” Collins said.

    Check out: Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates

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  • Here’s the ‘triple power play’ that may rule stock-market returns, other assets for next 5 years

    Here’s the ‘triple power play’ that may rule stock-market returns, other assets for next 5 years

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    Three powerful dynamics in the global economy are expected to play a significant role in investors’ multi-asset allocations over the next five years, according to a 132-page report from Rotterdam-based asset manager Robeco.

    The first is labor’s likely increased bargaining power, with the outcome of any tussle between businesses and their workers probably being determined by wages in a sticky inflation environment, based on the report compiled by strategists Laurens Swinkels and Peter van der Welle on behalf of the multi-asset team at Robeco, which manages $194 billion in assets. The second is the end of monetary-policy leniency and the potential for central banks to lock “horns” with governments over the appropriate level of borrowing costs. The third is the dawn of “multipolarity” as the U.S. and China struggle for power.

    Taken together, this “triple power play” is already starting to unfold, shifting investors into a world of higher risk-free rates and lower expected equity risk premiums, according to the asset manager. Risk premium is a gauge of relative value for stocks, helping investors understand what their short-term gain might be when taking on the additional risk of buying equities or investing in stock funds.

    Robeco provided its forecasts for five-year annualized, projected returns on a range of assets held by euro- and dollar-based investors — including developed- and emerging-market equities, bonds, and cash.

    The firm’s base-case scenario, which Robeco’s team refers to as a “stalemate,” calls for a mild recession in 2024, consumer-price inflation in developed economies to remain around 2.5% on average heading toward 2029, and real GDP in the U.S. to average 2.3% or below what the S&P 500 index
    SPX
    currently implies.

    That benign growth outlook is expected to be accompanied by macroeconomic volatility, plus a “tug of war” between central bankers reluctant to lower interest rates and governments in need of low borrowing costs — which “means there is not enough monetary policy tightening to remove demand-pull inflation.” Under such a scenario, developed-market equities are likely to underperform their emerging market counterparts and domestic bonds should offer a higher return than cash for dollar-based investors, according to Robeco.


    Source: Robeco. Returns shown are annualized.

    “Looking ahead, a key question is: are we eyeing the start of a new bull market that will broaden and pave the way for another streak of above-historical excess equity return?” the Robeco team wrote in the report released on Tuesday. “In our base case, we expect developed markets’ earnings growth to end up below current 5Y forward consensus projections, which are high single-digit or even still low double-digit for the U.S. and eurozone.

    “The reason we foresee a decline in profitability is linked to our overarching macro theme, the triple power play. Equities will likely bear the brunt of the power play in geopolitics,” according to the report. In addition, efforts by global corporations to shift production toward geopolitically-friendly powers or closer regions “will prove more costly and lower efficiency.” Plus, “further pressure from margins will come from a lagged response from past policy rate hikes.”

    Under Robeco’s bull-case scenario, early and rapid adoption of artificial intelligence across sectors and industries would likely spawn above-trend growth and push inflation back to central banks’ targets. The result is “an almost Goldilocks scenario in which things are running neither too hot nor too cold,” central banks could take a break from tightening policy, and developed- and emerging-market equities may both be able to come out with double-digit annualized returns from 2024 to 2028.

    The firm’s bear-case scenario envisions a world in which mutual trust between the world’s superpowers hits rock bottom, governments are “in the crosshairs” of central banks, and labor loses bargaining power in the services sector. A “stagflationary environment emerges, intensifying the policy dilemma for central bankers” as inflation stays stubbornly high at 3.5% on average and growth comes in at just 0.5% annually for developed economies. In that situation, developed-market equities would eke out an annualized return of 2.25% for dollar-based investors over the four-year period, which would be below the expected return on cash.

    On Thursday, all three major U.S. stock indexes
    DJIA

    SPX

    COMP
    finished higher as investors digested a batch of better-than-expected U.S. data and continued to expect no action by the Federal Reserve next week. Officials are seen as likely to leave their main policy rate target at a 22-year high of 5.25%-5% on Wednesday.

    As investors continued to monitor the possibility of a strike by United Auto Workers, 2-
    BX:TMUBMUSD02Y
    and 10-year Treasury yields
    BX:TMUBMUSD10Y
    ended at one-week highs and the ICE U.S. Dollar Index
    DXY
    jumped 0.6%. In a separate development earlier this week, Air Force Secretary Frank Kendall warned that China is preparing for a potential war with the U.S.

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  • Nasdaq ends 1% down, leading stocks lower as tech shares slump

    Nasdaq ends 1% down, leading stocks lower as tech shares slump

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    U.S. stocks closed lower on Tuesday, with the Nasdaq Composite leading the way down, as Apple’s unveiling of its new iPhone and watch failed to boost appetite for equities. The Dow Jones Industrial Average
    DJIA,
    -0.05%
    shed about 16 points, or about 0.1%, to end near 34,647, while the S&P 500 index
    SPX,
    -0.57%
    closed 0.6% lower and the Nasdaq Composite Index
    COMP,
    -1.04%
    slumped 1%, according to preliminary FactSet data. That was the biggest daily percentage drop in about a week for the Nasdaq. Shares of Apple Inc.
    AAPL,
    -1.71%
    were a focus Tuesday as it rolled out a lineup of new consumer products, including its iPhone Pro Max, which will now start at $1,199 instead of $1,099, while its Pro model’s price stays the same. Investors also remain focused on the inflation data, including the release on Wednesday of the consumer-price index for August, before the U.S. stock market’s open. Apple shares fell 1.9% on Tuesday. Climbing bond yields can pressure high-growth stocks as borrowing costs rise. The benchmark 10-year Treasury yield
    TMUBMUSD10Y,
    4.297%
    edged down 2.4 basis points to 4.263% Tuesday, but was still near its highest level of the year.

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  • Watch this ‘canary in the coal mine’ for signs of trouble in markets, Neuberger Berman CIO says

    Watch this ‘canary in the coal mine’ for signs of trouble in markets, Neuberger Berman CIO says

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    Neuberger Berman, an asset manager with eight decades under its belt, is on the lookout for cracks in credit markets from the Federal Reserve’s rate-hiking campaign.

    Erik Knutzen, chief investment officer of multi asset, worries that several factors could be a tipping point for the economy, from an economic slowdown in China to U.S. consumers finally becoming exhausted by higher rates.

    Yet Knutzen expects the high-yield, or junk bond, market to serve as the “canary in the coal mine” for broader market volatility, acting as “perhaps the most visible threat, and therefore one we think could be priced in sooner than later.”

    The Bloomberg U.S. High Yield Bond Index has returned 6.4% through the end of August, producing one of the year’s highest gains in fixed income, helped along by a “resilient U.S. economy coupled with still-available financial liquidity,” according to the Wells Fargo Investment Institute.

    But Knutzen worries that as the high-yield maturity wall draws closer, “the first policy rate cuts get priced further and further out, raising the threat of expensive refinancings.”

    The 10-year Treasury yield’s
    BX: TMUBMUSD10Y
    climb to a multidecade high in August of almost 4.4% left many major U.S. corporations in early September hesitant to borrow beyond 10 years.

    Starting next year, some $700 billion of high-yield bonds are set to mature through the end of 2027, with a big slice of the refinancing need coming from companies with riskier credit ratings below the top BB ratings bracket.

    The junk-bond maturity wall.


    Bloomberg, Wells Fargo Investment Institute, Moody’s Investors Service

    The two big U.S. exchange-traded funds linked to junk bonds are the SPDR Bloomberg High Yield Bond ETF
    JNK
    and the iShares iBoxx $ High Yield Corporate Bond ETF
    HYG,
    both up 1.8% and 1.5% on the year through Monday, respectively, while offering dividend yields of more than 5.8%, according to FactSet.

    Of note, fixed-income strategists at the Wells Fargo Investment Institute also said they see risks emerging in junk bonds for companies rated B and below, particularly with spread in the sector trading less than 400 basis points above the risk-free Treasury rate since July. Spreads are the premium that investors are paid on bonds to help compensate for default risks.

    Top corporate executives appear hopeful that the Federal Reserve will cut rates sooner than later. Fed Chairman Jerome Powell said in Jackson Hole, Wyo., in August that the central bank is prepared to keep its policy rate restrictive for a while to get inflation down to its 2% target.

    To that end, Neuberger Berman, which has roughly $443 billion in managed assets, sees several sources of volatility lurking through year’s end, and has a “defensive inclination” in equity and credit, favoring high-quality companies with plenty of free cash flow, high cash balances and less expensive long-term debt.

    U.S. stocks booked gains on Monday after a week of losses, with the S&P 500 index
    SPX
    and Nasdaq Composite Index
    COMP
    scoring their best daily percentage gains in about two weeks. The Dow Jones Industrial Average
    DJIA
    advanced 0.3%.

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  • What’s missing for investors in new $60 billion corporate borrowing blitz

    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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  • How one big stock-market investor is positioning for a decade of inflation

    How one big stock-market investor is positioning for a decade of inflation

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    With the threat of inflation back at the forefront for many investors, there’s one large stock-market investor positioning for it to be a decade-long phenomenon. In a note posted to the firm’s website, Chief Investment Officer William Smead of Phoenix-based Smead Capital Management, which oversees $5.83 billion in assets, said “we are loaded with inflation beneficiary stocks like oil and gas stocks and useful real estate.” The firm likes home builder D.R. Horton DHI; Simon Property Group SPG, a real estate investment trust…

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  • A recession could be nine months away, according to this telltale gauge

    A recession could be nine months away, according to this telltale gauge

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    The roughly $25 trillion Treasury market first began flashing this telltale sign that a U.S. recession likely lurks on the horizon almost a year ago, according to Bespoke Investment Group.

    It was late October of 2022 when the 3-month Treasury yield BX:TMUBMUSD03M first eclipsed the 10-year Treasury yield BX:TMUBMUSD10Y, resulting in an “inversion” of a key part of the yield curve that’s been a reliable predictor of past recessions.

    Where…

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  • How the U.S. housing market got stuck in the ’80s

    How the U.S. housing market got stuck in the ’80s

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    The Federal Reserve’s inflation fight has been particularly brutal for anyone not already a U.S. homeowner before interest rates and mortgage rates rose to 15-year highs.

    With mortgage rates around 7.2% to kick off the post–Labor Day period, the difference between the rates on a new 30-year home loan and on all outstanding U.S. mortgage debt (see chart) has not been so wide since the 1980s.

    It’s the 1980s again in the U.S. housing market.


    Glenmede, FactSet

    “Generally, climbing interest rates curb demand and cause housing prices to fall,” Glenmede’s investment strategy team wrote, in a Tuesday client note, but not this time.

    Instead, U.S. homes remain in critically low supply after more than a decade of underbuilding, and with most homeowners who already refinanced at low pre-pandemic rates being “reluctant to leave their homes,” wrote Jason Pride, chief of investment strategy and research, and his Glenmede team.

    Also, while homes prices have come off their prepandemic highs, they still were fetching $416,000 in the second quarter, based on median sales prices, above $358,700 in the fourth quarter of 2020, according to U.S. Census and HUD data.

    “Until the supply gap is filled by new construction, home prices and building activity are unlikely to decline as meaningfully as they normally would given the headwind from rising rates,” the Glenmede team said.

    Read: Housing affordability is now at its worst level since 1984, Black Knight says

    The Glenmede team, however, does expect more pressure on consumers in the coming months, particularly as student-loan payments resume in October and if the Fed keeps interest rates high for a while, as increasingly expected. The benchmark 10-year Treasury yield
    BX:TMUBMUSD10Y,
    which underpins the U.S. economy, was back on the climb at 4.26% Tuesday.

    Meanwhile, shares of home-vacation rental platform Airbnb Inc.
    ABNB,
    +7.23%
    rose 7.2% on Tuesday, after the Labor Day weekend, and 66.4% higher on the year so far, according to FactSet.

    Don’t miss: New York City cracks down on Airbnb and other short-term-rental listings

    Shares of Invitation Homes Inc.
    INVH,
    -0.91%    ,
    which grew out of the last decade’s home-loan foreclosure crisis to become a single-family-rental giant, were up 14.3% on the year, according to FactSet.

    Dallas Tanner, CEO of Invitation Homes, said he expected “the rising costs and the burden of homeownership” to continue to benefit his company, in a July earnings call. The company recently bought a portfolio of about 1,900 homes and has been snapping up newly constructed homes. Companies can borrow on Wall Street at much lower rates than individuals.

    Stocks closed lower Tuesday, with the Dow Jones Industrial Average
    DJIA
    off 0.5%, and the S&P 500 index
    SPX
    0.4% lower and the Nasdaq Composite Index
    COMP
    down 0.1%, according to FactSet.

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  • Dow closes down 200 points as bond yields, oil prices jump

    Dow closes down 200 points as bond yields, oil prices jump

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    U.S. stocks closed lower Tuesday after the long Labor Day weekend, as bond yields and oil prices climbed. The Dow Jones Industrial Average DJIA shed about 195 points, or 0.6%, ending near 34,642, according to preliminary FactSet data. The S&P 500 index SPX dropped about 0.4% and the Nasdaq Composite Index COMP fell 0.1%. Investors returned from the long weekend in a less bullish mood on weaker economic data from China and Europe, but also with more clouds on the horizon in oil markets. Oil prices CL00 closed at the highest level since November on Tuesday, after Saudi Arabia and Russia opted to extend oil supply production…

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  • This hadn’t happened on the U.S. Treasury market in 250 years. Now it’s about to.

    This hadn’t happened on the U.S. Treasury market in 250 years. Now it’s about to.

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    The 10-year Treasury bond is on track for a third year of losses in 2023, something that hasn’t happened in 250 years of U.S. history.

    In short, it has never happened, say strategists at Bank of America.

    The return for investors putting money in that bond
    BX:TMUBMUSD10Y
    stands at negative 0.3% so far in 2023, after a 17% slump in 2022 and a 3.9% drop in 2021, the bank’s strategists, led by Michael Hartnett, pointed out in a note on Friday.

    Here’s a visual on that:

    That reflects a “staggering 40% jump in U.S. nominal GDP growth” — factoring in growth and inflation — “since the COVID lows of 2020,” they said, providing this chart:

    Bond returns have suffered this year as the Federal Reserve has continued its interest-rate-hiking campaign aimed at getting inflation under control. The “big picture in the 2020s vs. the 2010s is lower stock and bond returns, which we would expect to continue given political, geopolitical, social [and] economic trends,” said Hartnett and the team.

    This year has been better for stocks
    DJIA

    SPX,
    but the bounce since COVID pandemic restrictions began to be lifted has been very concentrated in U.S. stocks, especially the technology sector, with breadth in global markets “breathtakingly bad,” the analysts said. Breadth refers to the number of stocks actively participating in a rally.

    Breadth is the worst since 2003 for the MSCI ACWI, which captures large- and midcap-stock representation across 23 developed markets and 24 emerging ones.

    As for the latest weekly flows into funds, Bank of America reported that $10.3 billion went to stocks, $6.5 billion to cash and $1.7 billion to bonds, with $300 million draining from gold
    GC00,
    -0.06%    .

    The yield on the 10-year Treasury was holding steady on Friday at 4.102% after data showed the U.S. economy generated 187,000 jobs in August, but the unemployment rate rose to 3.8% from 3.5%, and job gains were revised lower for July and June.

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  • This hadn’t happened on the U.S. Treasury market in 250 years. Now it’s about to.

    This hadn’t happened on the U.S. Treasury market in 250 years. Now it’s about to.

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    The 10-year Treasury bond is on track for a third year of losses in 2023, something that hasn’t happened in 250 years of U.S. history.

    In short, it has never happened, say strategists at Bank of America.

    The return for investors putting money in that bond
    BX:TMUBMUSD10Y
    stands at negative 0.3% so far in 2023, after a 17% slump in 2022 and a 3.9% drop in 2021, the bank’s strategists, led by Michael Hartnett, pointed out in a note on Friday.

    Here’s a visual on that:

    That reflects a “staggering 40% jump in U.S. nominal GDP growth” — factoring in growth and inflation — “since the COVID lows of 2020,” they said, providing this chart:

    Bond returns have suffered this year as the Federal Reserve has continued its interest-rate-hiking campaign aimed at getting inflation under control. The “big picture in the 2020s vs. the 2010s is lower stock and bond returns, which we would expect to continue given political, geopolitical, social [and] economic trends,” said Hartnett and the team.

    This year has been better for stocks
    DJIA

    SPX,
    but the bounce since COVID pandemic restrictions began to be lifted has been very concentrated in U.S. stocks, especially the technology sector, with breadth in global markets “breathtakingly bad,” the analysts said. Breadth refers to the number of stocks actively participating in a rally.

    Breadth is the worst since 2003 for the MSCI ACWI, which captures large- and midcap-stock representation across 23 developed markets and 24 emerging ones.

    As for the latest weekly flows into funds, Bank of America reported that $10.3 billion went to stocks, $6.5 billion to cash and $1.7 billion to bonds, with $300 million draining from gold
    GC00,
    +0.02%    .

    The yield on the 10-year Treasury was holding steady on Friday at 4.102% after data showed the U.S. economy generated 187,000 jobs in August, but the unemployment rate rose to 3.8% from 3.5%, and job gains were revised lower for July and June.

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

    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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  • Dow ends up 200 points, stocks score back-to-back gains

    Dow ends up 200 points, stocks score back-to-back gains

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    U.S. stocks scored back-to-back gains on Monday in an attempt to claw back ground in a rough August for equities. The Dow Jones Industrial Average
    DJIA,
    +0.62%
    rose about 213 points, or 0.6%, ending near 34,560, according to preliminary data from FactSet. The S&P 500 index
    SPX,
    +0.63%
    closed 0.6% higher and the Nasdaq Composite Index
    COMP,
    +0.84%
    gained 0.8%. Investors kicked of the final week of August on an upbeat note, while largely focusing on Thursday’s inflation data and Friday’s monthly jobs report to help inform the Federal Reserve’s path on interest rates and its inflation fight. The 10-year Treasury yield
    TMUBMUSD10Y,
    4.203%
    eased back to about 4.20% late Monday after its sharp rise a week ago to its highest level since 2007. The Dow still was off about 2.8% so far in August, while the S&P 500 index was 3.4% lower and the Nasdaq was down 4.5%, according to FactSet.

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  • Investors parked heavy in cash may be making a ‘mistake’, Nuveen says

    Investors parked heavy in cash may be making a ‘mistake’, Nuveen says

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    Investors sitting on the sidelines in cash and in money-market funds might consider moving into longer-dated bonds sooner rather than later, according to Saira Malik, chief investment officer at Nuveen.

    As look at historical returns shows the broader $55 trillion U.S. bond market typically outperforms short-term Treasurys at the end of past Federal Reserve rate hiking cycles since the 1990s.

    The bond market produced an average 5.5% three-month rolling return following the last rate hike (see chart) in the past four Fed hiking cycles, while short-term Treasurys returned 2.1%.

    This data includes the three-month rolling average performance of bonds in all Federal Reserve rate-hiking cycles since 1990 (1995, 2000, 2006 and 2018) based on the Bloomberg U.S. Aggregate Bond Index and the Bloomberg U.S. Treasury 1-3 Year Index


    Bloomberg, Nuveen

    Of note, the magnitude of the bond market’s outperformance faded by 12 months versus short-term positions, when looking at the Bloomberg U.S. Aggregate Bond Index’s performance relative to the Bloomberg U.S. Treasury 1-3 Year Index.

    “The broad market typically experienced a strong relief rally immediately after the Fed pause and mostly outperformed the following year,” Malik said, in a Monday client note. “This lends further credence to our view that overallocating to cash or short-term government debt could be a mistake — and that investors may want to start closing their duration underweights.”

    Individuals can gain exposure to Wall Street bond indexes through related exchange-traded funds, including the iShares Core U.S. Aggregate Bond ETF
    AGG
    and the SPDR Bloomberg 1-3 Year U.S. Treasury Bond UCITS ETF
    UK:TSY3
    for short-term Treasury exposure.

    Fed Chairman Jerome Powell signaled on Friday that additional rate hikes might be needed to keep the U.S. cost of living in retreat, even though rates already sit at a 22-year high and inflation has fallen sharply in the past year, while speaking at the annual Jackson Hole gathering in Wyoming. He also reiterated a vow to keep rates at a restrictive level for a while to keep inflation in check.

    Malik pointed to cooling housing inflation as a positive sign on the inflation front. Home buyers have pulling back as the benchmark 30-year mortgage rate hit an average of 7.31%, the highest levels since 2000.

    She also expects U.S. economic growth to slow and a “partial retracing” of the 10-year Treasury yield
    BX:TMUBMUSD10Y,
    following its surge in recent weeks.

    “Historically, the 10-year yield has peaked within the last few months of the final rate hike in a tightening cycle. We expect this hike will occur at either the September or November Fed meeting, and that the 10-year yield will decline through year-end.” Yields and debt prices move opposite each other.

    Related: Pimco emerges as a buyer in Treasury market selloff, says Bond Vigilante theme ‘a bit extreme’

    Stocks were higher Monday, with the Dow Jones Industrial Average
    DJIA
    up 0.5%, the S&P 500 index
    SPX
    0.3% higher and the Nasdaq Composite Index
    COMP
    up 0.4%, according to FactSet.

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