Tag: U.S. 10 Year Treasury Note

Fed’s Powell leaves investors with a cloud of uncertainty. Why the U.S. stock market faces a difficult week ahead.

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The U.S. stock market recovered from a three-week losing streak this week, though release of Nvidia’s earnings and a speech by Federal Reserve Chair Jerome Powell at the Jackson Hole Economic Symposium provided some volatility, but the artificial intelligence boom offset rising bond yields.

Next week, the July personal consumption expenditure index, the Fed’s preferred measure of inflation, and the latest monthly employment report will offer another trial for the markets as investors assess whether stocks can defend their recent gains under the “cloudy skies” of uncertainty over the economic outlook.

On Friday, Fed Chair Powell said the central bank is prepared to raise interest rates further until policymakers are confident that inflation is on a convincing path toward the Fed’s 2% target, but he admitted they remain unsure of whether more rate hikes are needed as the economy may not have felt the full effect yet of the monetary tightening over the past year and a half.

“Powell is in this position where he’s trying to summit one of the Grand Tetons and he doesn’t do that without pausing and catching his breath,” said Johan Grahn, head ETF market strategist at Allianz Investment Management. Grahn thinks the Federal Open Market Committee is debating whether they have reached the “summit,” or one of the “peaks,” or are at a “false summit” in their endeavors to curb inflation through interest-rate hikes and demand moderation.

“Powell needs these ‘data clouds’ to give him a sign so that they know if the work is done, and I don’t believe that he will know that between now and September,” Grahn said.

Powell’s heavily anticipated address at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming came days after Nvidia
NVDA,
-2.43%,
the chip maker at the forefront of an industry-wide AI frenzy, delivered blowout earnings that surpassed Wall Street’s estimates, thanks largely to a boom in revenue from generative AI. However, both events were largely in line with expectations eliciting yawns from a sleepy August Wall Street, said market analysts.

U.S. stocks finished the week mostly higher with the Dow Jones Industrial Average
DJIA
down 0.5%, while the S&P 500
SPX
gained 0.8% and the Nasdaq Composite
COMP
climbed 2.3% for the week, according to Dow Jones Market Data.

See: Hot U.S. economy pushes real yields to around 15-year highs after Powell’s Jackson Hole speech

However, the biggest event for markets is always the next one.

With the second-quarter earnings reporting season coming to an end, major economic data in coming days will provide some guidance on the resilience of the U.S. economy and whether the Fed will raise interest rates further at its September 19-20 policy meeting.

“There’s a dearth of corporate news that’s really going to move the markets, which means traders and investors are going to focus their attention on the macro components,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial.

Next week, the markets will get the latest reports on the jobs market, including the July Job Openings and Labor Turnover Survey (JOLTS) due out on Tuesday, followed by August ADP’s National Employment Report on Wednesday. The Labor Department’s August nonfarm payrolls report will center stage on Friday.

The U.S. economy is expected to add 175,000 new jobs in August, down from 187,000 in the prior month, economists polled by the Dow Jones estimate. The percentage of jobless Americans seeking work is forecast to remain unchanged at 3.5% from the previous month. The central bank in June predicted unemployment would climb to 4.1% by the end of 2023, compared with 4.5% in March’s prediction, according to the quarterly Summary of Economic Projections.

Meanwhile, the Bureau of Economic Analysis on Thursday will release its Personal Consumption Expenditures (PCE) Index — the Fed’s preferred inflation gauge — for July.

Annual U.S. inflation in July is forecast to creep back up to 3.3% year-over-year from 3% in the prior month, while consumer prices are expected to rise another mild 0.2% for the month. The so-called “core” PCE is also expected to tick up slightly to 4.2% from 4.1% in June, according to Wall Street analysts polled by Dow Jones. The core rate omits volatile food and energy costs and is viewed by the Fed as a better predictor of future inflation trends.

Powell, during his speech at Jackson Hole, pointed to the core PCE as his focus. “The lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said.

Investors need the “Goldilocks scenario” where economic growth is slowing, but not falling off a cliff, which would suggest that the Fed is closer to being done raising interest rates, Saglimbene told MarketWatch in a phone interview on Friday. “Any stronger than expected economic data, such as hotter-than-expected PCE inflation and employment report, may be greeted by the market as negative.”

While the July PCE report will be the “linchpin” for the September policy meeting, the data would have to skew significantly away from expectations in order for policymakers to take “one more step up this proverbial mountain,” said Grahn.

However, the assessment of the precise level of monetary policy restraint is complicated by uncertainty about the duration of the lags with which monetary tightening affects economic activity and inflation, Powell said on Friday, noting “the wide range of estimates” of these lags suggests that there may be “significant further drag” in the pipeline.

“The lag effect, in my opinion, overshadows the concern that two months of good inflation readings is not a trend,” Grahn told MarketWatch via phone on Friday. “The lag effect is starting to work its way into the economy, but it’s not reasonable to believe it will show the full impact in the next four weeks, so I would expect a meeting in September with a decision to nothing.”

Overall the U.S. stock market has slumped this month as August once again lives up to its dismal reputation for stocks. The S&P 500 has lost nearly 4% so far this month, on course for its biggest monthly loss of 2023, while the Dow Jones Industrial Average was down 3.4% and the Nasdaq Composite has dropped 5.3% month-to-date, according to Dow Jones Market Data.

These pullbacks are seen as a sharp contrast to the AI-driven rally earlier this year when the Nasdaq Composite had its best first-half performance since 1983, as investors hoped the Fed might be able to back off its inflation battle more quickly than markets have expected.

However, recent strong economic data has raised concern that the Fed will keep its benchmark lending rates higher for longer than anticipated, which triggered a jump in longer-dated Treasury yields.

The 10-year Treasury note yield
BX:TMUBMUSD10Y
rose to its highest level since November 2007 on Monday, according to Dow Jones Market Data. Elsewhere, a slowdown in China’s economy after emerging from COVID-19 lockdowns, the lingering debt troubles in its real-estate sector and the uncertainty of Beijing’s policy support are also feeding into broader unease in the U.S. financial markets.

See: Global investors expect China to deliver a massive fiscal stimulus. Here’s why it may never arrive.

August is historically not the best month for the U.S. stock market. Investors came into August of 2023 with five straight months of gains for the S&P 500 index and the Nasdaq Composite, so there was an “excuse” for investors to take profits on megacap technology companies which are trading at “rich valuations,” Saglimbene said.

The weekly AAII Investor Sentiment Survey shows bullish sentiment decreased and is below average for the second consecutive week in the seven days to Wednesday. In the most recent survey, only 32.3% of respondents had a bullish outlook for the stock market, which is below the historical average of 37.5%.

However, historical data shows that September may not look much better than August as September is traditionally the weakest month for U.S. stocks. The S&P 500 and the Dow industrials each has lost an average of 1.1% in September dating back to 1928 and 1896, respectively, according to Dow Jones Market Data.

See: Here are the odds that the stock market will crash

Moreover, there’s still a concern that the Fed is going to raise interest rates again and may slow the economy more than expected, which may end up causing a recession in 2024, said Saglimbene.

“I don’t think traders are ready to step into the market and buy based on these declines, but I do think if we see more pressure in September while macro conditions are holding up, you’re going to have more investors step in and start buying, and that could be more supportive [for stocks] in the back half of this year when seasonality trends get better.”

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August 27, 2023
U.S. stocks end higher after Fed Chair Powell’s Jackson Hole remarks, S&P 500 snaps 3-week losing streak

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U.S. stocks ended higher Friday after Federal Reserve Chairman Jerome Powell warned the central bank may need to raise interest rates even higher to temper a strong U.S. economy and quell inflation, while assuring investors that monetary policy would proceed cautiously.

How stock indexes traded

For the week, the Dow fell 0.4%, the S&P 500 gained 0.8% and the Nasdaq climbed 2.3%, according to Dow Jones Market Data. The Dow booked back-to-back weekly losses, while the S&P 500 and technology-heavy Nasdaq Composite each…

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August 25, 2023
How Nvidia’s Jensen Huang may be driving Fed rate-hike expectations

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“‘You could ask who is really running the show? Jerome Powell or Jensen Huang? Amazingly, it may not be Powell, but Jensen Huang who is driving Fed expectations.’”

— Ben Emons of NewEdge Wealth.

Those are the words of Ben Emons, a senior portfolio manager and the head of fixed income at NewEdge Wealth in New York, who identifies reasons why artificial-intelligence leader Nvidia Corp.
NVDA,
-2.77%
is demonstrating central-bank-like powers.

It starts with the idea that the Santa Clara, California-based chip designer — which reports fiscal second-quarter earnings on Wednesday — acts as a bellwether for AI-capital expenditures that are likely to boost productivity across the U.S. economy. And in the bond market, a surge of AI-related expectations is translating into higher real yields, which reflect inflation-adjusted growth in gross domestic product and productivity, he said.

Read: Nvidia’s stock snaps losing streak and sits 1% below record close as earnings optimism builds

Higher real yields in the U.S. are a key reason why 10-
BX:TMUBMUSD10Y
and 30-year Treasury yields
BX:TMUBMUSD30Y
climbed to multi-year highs through Monday. Real yields, as measured by rates of Treasury inflation-protected securities, offer a glimpse of how the market expects the U.S. to perform when inflation isn’t a factor.

Read: Rise in Treasury yields is almost entirely due to one factor, strategist says

“The bigger macro story behind Nvidia as the bellwether of artificial intelligence is the role it plays in the economy, which is proving to be stronger than anyone thought it would be,” Emons said via phone on Tuesday. “People connect AI to productivity and productivity leads to growth, and to some extent this is impacting interest-rate expectations today.”

Amid growing anticipation over Nvidia’s upcoming earnings announcement and Friday’s speech by Federal Reserve Chairman Jerome Powell in Jackson Hole, Wyo., “the probability of a rate hike is creeping higher,” the senior portfolio manager wrote in a note this week. “With each additional dollar increase of NVDA EPS estimates, the probability of a hike by November goes up. NVDA is gaining Fed-like power.”

Need to Know: Nvidia may be the AI stock for now, but here are the picks for later, says Goldman Sachs

A chart provided by Emons shows how the median estimate of analysts for Nvidia’s earnings-per-share in the fiscal second quarter has been rising alongside the market-implied probabilities of a November Fed rate hike.

Source: Bloomberg, Nvidia

In addition, the yield on one of Nvidia’s own corporate bonds, issued in 2020 and maturing in April 2040, has been rising in relation to the 10-year TIPS or real yield “because of the company’s broader effect on the economy,” Emons said.

Source: Nvidia, U.S. Treasury

As University of Pennsylvania Wharton School finance professor Jeremy Siegel explained in a separate interview with MarketWatch, real interest rates track real growth. Improving productivity and stronger growth “mean the Fed won’t be able to cut rates as much as it would otherwise be able to.”

On Tuesday, Treasury yields finished mixed, while Nvidia’s shares closed down by 2.8%, as traders and investors await the company’s earnings report on Wednesday followed two days later by Powell’s remarks.

Analysts expect Powell to address what’s known as the real neutral rate of interest — or the inflation-adjusted level which is likely to prevail when the economy is operating at full strength and price gains are stable — as a way of justifying the higher-for-longer theme in U.S. interest rates.

See also: How higher-for-longer rates are playing out as 10-year yield hits 15-year high

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August 22, 2023
Rise in Treasury yields is almost entirely due to one factor, strategist says

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The recent rise in long-dated Treasury yields boils down to mostly one single thing, which is higher real rates resulting from changing expectations for U.S. economic growth, according to Joseph Kalish, chief global macro strategist at Ned Davis Research.

Kalish attributes 90% of the increase to that factor alone. He points out that 5-
BX:TMUBMUSD05Y,
7-
BX:TMUBMUSD07Y,
10-
BX:TMUBMUSD10Y
and 20-year Treasury yields are all up significantly since 2021-2022. On Tuesday, the 10-year rate finished at 4.327%, slightly off its almost 16-year high. Meanwhile, the 5-year Treasury yield, which reflects the intermediate part of the Treasury curve known as the belly, has trended higher as traders and investors factor in prospects for a stronger U.S. economy beyond the next few years.

Source: Tradeweb

Source: Tradeweb

Ordinarily, Treasury yields tend to rise based on a range of factors, such as the possibility of higher future inflation and investors’ demands to be compensated for that risk. This time around appears to be a bit different.

Real rates, as measured by yields on Treasury inflation-protected securities, reflect the market’s view of how the economy is performing after subtracting inflation. In other words, they present a purer read on how the U.S. is likely to do when inflation isn’t a factor. And right now, real yields are rising on the strength of recent economic data as investors hold out some hope for a soft landing, or scenario in which inflation comes down on its own without a recession or major jump in unemployment, or even no landing at all.

“Bond yields have come a long way in a short period of time,” Kalish wrote in a note distributed on Tuesday. “Nearly all of the rise has been due to higher real yields,” though an increase in the supply of U.S. government debt is also likely playing a contributing role.

As of Monday, 10- and 30-year Treasury yields
BX:TMUBMUSD30Y
had respectively jumped by 105.4 basis points and 91.7 basis points since early April, and closed at their highest levels since Nov. 6, 2007, and April 27, 2011. However, they ended lower on Tuesday at 4.327% and 4.410% as investors and traders took a break from the aggressive selloff of long-dated government debt seen over the past week.

The runup in Treasury yields has been blamed for a stock-market pullback, which has seen the S&P 500
SPX
retreat 4.4% so far in August. The large-cap benchmark remains up 14.3% so far this year.

As traders and investors await Federal Reserve Chairman Jerome Powell’s Jackson Hole address on Friday, Kalish wrote that “the market has been consistently underpricing the risk of additional rate hikes and overpricing the speed of rate cuts.” Powell will be “pleased at the progress on goods inflation, hopeful that the labor market is getting into better balance, but concerned about the economy growing faster than trend.”

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August 22, 2023
Stocks end mostly lower, Nasdaq books biggest 3-week drop since December

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Stocks closed mostly lower Friday, capping off a bruising week of losses as Treasury yields jumped and China’s mounting property woes gripped investors. The Dow Jones Industrial Average
DJIA,
+0.07%
rose about 27 points, or 0.1%, ending near 34,501, according to preliminary FactSet data. The S&P 500 index
SPX,
-0.01%
was nearly flat at 4,370 and the Nasdaq Composite Index
COMP,
-0.20%
shed 0.2%, despite briefly turning positive late in the session. It still was a tough week for equities, with the Dow booking a 2.2% loss, the S&P 500 index a 2.1% decline and the Nasdaq a 2.6%. The Nasdaq also posted its biggest 3-week decline since December 2022, according to Dow Jones Market Data. Yields on the 10-year Treasury rose for a 5th week in the row, with the benchmark
TMUBMUSD10Y,
4.252%
rate briefly touching its highest level since November 2007, before settling back at 4.251% on Friday. China Evergrande’s
EGRNF,

Chapter 15 bankruptcy filing in New York late Thursday kept focus on the wobbling property market in the world’s second-largest economy. Earlier in the week, Country Garden Group missed a dollar-denominated debt payment. Next week investors will be focused on Federal Reserve Chairman Jerome Powell’s speech on Friday at the Jackson Hole economic summit for hints to whether the central bank is likely done hiking rates in this cycle. The Fed’s policy rate sits at its highest level in 22 years.

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August 18, 2023
The selloff in Treasurys isn’t over yet, Barclays warns

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There is room for a continued selloff in U.S. Treasurys which has already pushed 10- and 30-year yields to their highest levels since 2007 and 2011, according to researchers at Barclays.Though the recent selloff took a breather on Friday, the steady drive higher in long-dated yields which unfolded this week left observers warning that the era of low rates may be firmly behind the U.S. as a new normal appears to take shape in the bond market. Long-term rates yields are just beginning to enter ranges that have been historically consistent with where they traded during the early 2000s.Read: Why Treasury yields keep rising,…

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August 18, 2023
U.S. stocks open lower with Dow industrials heading for worst week since March

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U.S. stock indexes opened lower on Friday as the Dow Jones Industrial Average is on pace to book its worst week since March, while the S&P 500 and the Nasdaq Composite are headed for their third straight week of losses. The Dow industrials
DJIA,
-0.26%
was down 156 points, or 0.4%, to 34,328, with the blue-chip gauge dropping 2.7% for the week. The S&P 500
SPX,
-0.54%
lost 0.6% on Friday, on pace to post a weekly decline of 2.7%. The Nasdaq
COMP,
-0.94%
was off 0.9%, losing 3.3% so far this week, according to FactSet data. Treasury yields were slightly lower on Friday morning, with the 10-year yield
TMUBMUSD10Y,
4.234%
down 2 basis points, at 4.27% after rising to its highest level since 2007 in the previous session.

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August 18, 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
Stocks post back-to-back loss after Fed minutes point to lingering inflation and rate risks

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U.S. stocks posted back-to-back losses Wednesday after Federal Reserve minutes of its July meetings showed concerns about inflation revving back up. The Dow Jones Industrial Average DJIA fell about 180 points, or 0.5%, ending near 34,765, according to preliminary FactSet data. The S&P 500 index SPX gave up 0.8% and the Nasdaq Composite Index COMP closed 1.2% lower. All three benchmarks booked back-to-back loses, while the S&P 500 ending at its lowest level in more than a month. Minutes of the Fed’s July 25-26 meeting said “most participants continue to see significant upside risks to inflation, which could require further…

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August 16, 2023
The S&P 500 is flashing a warning that U.S. stocks are likely headed lower after breaking below its 50-day moving average

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The S&P 500 on Tuesday closed below its 50-day moving average for the first time since March. It could portend more losses for the index, technical analysts said, suggesting that the summertime stock-market selloff isn’t over yet.

After trending lower all session, the index SPX closed down 51.86 points, or 1.2%, to 4,437.86 on Tuesday, its lowest closing level since July 11, according to FactSet data.

It…

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August 15, 2023
‘Good news really is bad news’: Stocks hit a roadblock as strong retail sales reinforce soft-landing view

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Investors were jolted by a stronger-than-expected retail sales report on Tuesday, which underscores the dual-edged sword now facing markets.

July’s 0.7% surge in retail sales is helping to bolster the view that a resilient U.S. economy can avoid a recession, despite more than a year of rate hikes by the Federal Reserve. However, the data also serves as another piece of information that some policy makers can use to support even more hikes in the final four months of this year, and left the benchmark 10-year Treasury yield…

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August 15, 2023
Dow, S&P 500 and Nasdaq post gains as big tech stocks rebound

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U.S. stocks closed higher on Monday, with the Dow flipping positive near the closing bell, as technology stocks bounced back. The Dow Jones Industrial Average DJIA rose about 26 points, or 0.1%, ending near 35,308, according to preliminary FactSet data. The S&P 500 index SPX scored a 0.6% gain and the Nasdaq Composite Index COMP closed up 1.1%, booking its best daily percentage climb since July 28, according to FactSet data. The S&P 500’s information technology sector outperformed with a 1.9% gain, while the communication services segment rose 1%. The rally saw shares of Meta Platforms META, Apple Inc. AAPL, Alphabet…

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August 14, 2023
Rising Treasury yields spooked the stock market. Now, a key test lies ahead.

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A worsening U.S. fiscal situation caught stock and bond investors off guard in the past week and now a round of approaching government auctions is about to provide a crucial test for Treasurys.

The question in the days ahead is whether risks to the demand for U.S. government debt are growing. If so, that could put upward pressure on Treasury yields, which would undermine the performance of stocks. However, if investors end up caring less about the fiscal situation than they do about the possibility of slowing economic growth and decelerating inflation, government debt’s safe-haven appeal could be reinforced, putting a limit on how high yields might go.

Concern about the deteriorating fiscal outlook was a factor behind the past week’s rise in long-term Treasury yields. Ten-
BX:TMUBMUSD10Y
and 30-year yields
BX:TMUBMUSD30Y
respectively jumped to 4.188% and 4.304% on Thursday, the highest levels since early November, as investors sold off long-term government debt — which took the shine off U.S. stocks. By Friday, though, a moderating pace of U.S. job creation for July sent yields into reverse, giving equities a temporary lift during the final trading session of the week.

At issue is the extent to which potential buyers of Treasurys may be deterred by Fitch Ratings’ Aug. 1 decision to cut the U.S. government’s top AAA rating, at a time when the government is about to unleash what Barclays rates strategists describe as a “tsunami” of supply. A total of $103 billion in 3-, 10-and 30-year Treasurys come up for sale between Tuesday and Thursday. In addition, a spate of Treasury bills are scheduled to be auctioned starting on Monday.

Gene Tannuzzo, global head of fixed income at Boston-based Columbia Threadneedle Investments, said that while he and his team still have room to add T-bills to the government money-market funds they oversee during the week ahead, they haven’t made up their minds about whether to buy more longer-dated maturities for their bond funds.

“While we are comfortable that the Fed is at or near the end of its rate hikes, there are a lot more questions about the durability of the economic recovery, the degree that inflation will remain low, and the risk premium that needs to be put in at the long end,” Tannuzzo said via phone.

Treasury’s $1 trillion third-quarter borrowing plans, along with some technical issues and the Bank of Japan’s decision to switch to a more flexible yield-curve control approach, might reduce demand for U.S. government debt, he said. Columbia Threadneedle managed $617 billion as of June.

“One can’t ignore the risk of an unruly rise in yields, but our view is that this is a low risk and what the Treasury auctions may produce instead is ‘indigestion,’ driven by poor technicals and low liquidity, Fitch’s downgrade, and the Bank of Japan action — and by the end of August, we should be past much of this,” he told MarketWatch.

Key Words: Warren Buffett dismisses Fitch downgrade: ‘There are some things people shouldn’t worry about’

Risks to the demand for Treasurys may become obvious soon, given Tuesday-Thursday’s $103 billion in total sales of 3-, 10- and 30-year securities, according to analyst John Canavan of U.K.-based Oxford Economics. The main “question mark” for the market’s ability to absorb the increased Treasury issuance will be whether or not domestic investment funds continue to show interest, Canavan wrote in a note distributed on Friday.

Source: Oxford Economics.

“ ‘My suspicion is that with higher rates comes equally solid demand’ at upcoming auctions.”

— John Flahive, head of fixed income at BNY Mellon Wealth Management

Market players have had little difficulty absorbing Treasury coupon issuances in recent years because of flight-to-safety trades made after the U.S. onset of the Covid-19 pandemic in 2020. Now, however, increased auction sizes are being accompanied by still-elevated inflation, better-than-expected economic growth, and the possibility of more rate hikes by the Federal Reserve — which is likely to complicate the market’s ability to absorb the increased supply “without hiccups,” Canavan said.

Read: Who is buying all the Treasury auctions? Domestic funds got a record share, but another deluge is coming.

On the flip side of the debate is John Flahive, head of fixed income at BNY Mellon Wealth Management in Boston, which managed $286 billion in assets as of June. He said equity markets will continue to be much more focused on economic developments and earnings. And as long as the latter of the two remains robust, stocks “can grind higher in a low-volatility environment,” Flahive said via phone.

Saying he does not expect his team to be a major participant in the Treasury auctions, Flahive said that the bond market’s reaction in the past week was “a little overdone” and “we always felt that there was a limited to how much yields could go up to reflect more government debt.”

“My suspicion is that with higher rates comes equally solid demand” at upcoming auctions, he said. “I’m still optimistic about rates going back down over time as the result of a slowing economy and decelerating inflation. We continue to like the bond market and see a better-than-even chance that yields go down as the economy continues to weaken in the quarters ahead.”

Friday’s reaction to July’s official jobs report, which showed the U.S. added a modest 187,000 new jobs, provided a breather from the past week’s run-up in Treasury yields.

On Friday, the 30-year Treasury yield fell 9 basis points to 4.214%, yet still ended with its biggest weekly gain since early February. The 10-year rate, which dropped 12.8 basis points to 4.06%, finished with a third straight week of advances.

Stocks fell Friday, leaving major indexes with weekly declines. The Dow Jones Industrial Average
DJIA
posted a 1.1% weekly fall, while the S&P 500
SPX
shed 2.3% and the Nasdaq Composite
COMP
retreated 2.9%. The soft start to August comes after a run of sharp gains for equities. The S&P 500 remains up 16.6% for the year to date.

The economic calendar for the week ahead includes U.S. inflation updates.

On Monday, June consumer-credit data is set to be released. Tuesday brings the NFIB’s small business optimism index, plus data on the U.S. trade balance and wholesale inventories. Then on Thursday, weekly initial jobless claims and the July consumer-price index are released. That’s followed on Friday by the producer-price index for last month and an August consumer-sentiment reading.

Meanwhile, portfolio manager and fixed-income analyst John Luke Tyner at Alabama-based Aptus Capital Advisors, which manages roughly $5 billion in assets, said he plans to follow the Treasury auctions, but doesn’t usually participate in them.

“One of the biggest trends we’ve seen is the continued increase in the issuance amounts from Treasury. Whatever we are budgeting for is never enough, which justifies the Fitch downgrade,” Tyner said via phone. “It’s tough to say people aren’t going to buy U.S. debt, but you’ve got to entice them to buy duration and take the risk.

“The U.S. is not an emerging market, but ultimately we are going to see the market rate that participants require be higher, with a notable uptick in term premia,” he said. “What we could see in the face of all this issuance is a grind up in yields on an auction-by-auction basis. If I look at the technicals, a 4.9%-5% yield on the 10-year note seems in the cards,” and “it will be difficult for stocks to hold or expand from full valuations as rates run up.”

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August 6, 2023
Stocks close lower, S&P and Dow post first weekly loss in 3 weeks after historic U.S. downgrade

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US. stocks closed lower Friday, capping off a volatile week that finished with losses after Fitch took away its top AAA ratings for the U.S. and government bond yields embarked on a wild ride. The Dow Jones Industrial Average
DJIA,
-0.43%
fell about 150 points, or 0.4% on Friday, ending near 35,065, according to preliminary FactSet data. The S&P 500 index
SPX,
-0.53%
shed 0.5% and the Nasdaq Composite Index closed 0.4% lower. For the week, the Dow posted a 1.1% decline, the S&P 500 a 2.3% drop and the Nasdaq shed 2.9% since Monday, according to FactSet. Investors were focused on July jobs data released on Friday for clues to the health of the economy and potential next moves by the Federal Reserve on rates. The 10-year Treasury yield
TMUBMUSD10Y,
4.045%
swung almost 13 basis points lower on Friday to 4.06%, after briefly climbing to about 4.2% earlier in the week, according to FactSet data.

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August 4, 2023
S&P 500 books biggest drop since April after U.S. loses AAA ratings for a second time

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Stocks fell on Wednesday, a day after Fitch Ratings lowered its U.S. debt ratings to AA+ from the top AAA category, pointing to its growing debt burden and “erosion of governance” over the past two decades. The S&P 500
SPX,
-1.38%
fell about 63 points, or 1.4%, ending near 4,513, booking its biggest daily percentage decline since April 25, according to preliminary Dow Jones Market Data. The Dow Jones Industrial Average
DJIA,
-0.98%
shed about 1%, while the Nasdaq Composite Index
COMP,
-2.17%
closed 2.2% lower. Stocks already had been taking a breather from their march toward record levels when Fitch on Tuesday evening made good on a threat to downgrade its U.S. debt rating a notch to AA+. Longer-dated Treasury yields rose Wednesday, with the 10-year Treasury rate
TMUBMUSD10Y,
4.105%
touching 4.07%, according to FactSet. Treasurys and other haven assets are viewed as likely to benefit from a flight to safety in a scenario where investors get more jittery about the U.S. economic outlook.

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August 2, 2023
What Fitch’s U.S. credit downgrade means for investors

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As you’ve probably heard by now, Fitch Ratings late Tuesday cut the U.S. federal government’s credit rating to AA+ from AAA.

Here’s a look at what it means for investors and markets:

What’s a credit rating?

A credit rating is an independent assessment of the ability of an organization, including corporations and governments, ranging from school boards to cities, counties, states and countries, that have issued debt to meet their obligations. Fitch — alongside S&P Global and Moody’s Investors Service — is one of the world’s big three ratings firms.

Need to Know: The U.S. is downgraded. How much does it matter to markets? And the surprise asset that may benefit.

The ratings firms use scales that employ letters, and in Moody’s case also include numbers, to provide a guide to creditworthiness. At the top of the list is the AAA rating from S&P and Fitch, or Aaa, in the case of Moody’s. AA+ is the second-highest rating.

Ratings that employ Cs are at the bottom of the scales, with Fitch and S&P using D ratings in cases of default or bankruptcy.

Any rating below BBB- from Fitch and S&P, or Baa from Moody’s, is considered below “investment grade.” Such debt is often termed “junk.”

Why did the U.S. rating get cut

Fitch had warned in May that a cut was possible, with the ratings firm expressing dismay over what it termed another round of “brinkmanship” around the U.S. government’s debt ceiling. The warning came amid a battle between congressional Republicans and the Biden administration over lifting or suspending the federal government’s debt ceiling.

The limit has been a frequent source of political squabbling. While the showdown was resolved with a two-year suspension of the limit, the battle underlined the high stakes. Failure to reach a deal could have led to a default. In Tuesday’s decision, Fitch said that the past two decades have seen “a steady deterioration in standards of governance” in the U.S., the debt-ceiling agreement notwithstanding.

How does the U.S. rating stack up to other countries

Fitch isn’t the first of the big three ratings firms to strip the U.S. of its AAA rating. S&P did so in 2011, amid an earlier debt-limit battle. That leaves Moody’s as the only firm to still assign the U.S. its top rating.

The pool of triple-A sovereign ratings, meanwhile, continues to dwindle. Only a handful of countries carry triple-A ratings across the board from all three ratings firms.

See: Here are the countries that still have Triple-A credit ratings across the board

What does rating cut mean to investors?

The cut isn’t seen having much lasting effect on investor demand for U.S. Treasurys. The market for Treasurys is the largest and most liquid debt market in the world. Despite the lack of triple-A ratings, Treasurys are viewed and treated by investors as being virtually “risk-free,” or equivalent to cash. Other types of debt are often quoted in terms of the yield premium, or spread, demanded by investors to hold them over Treasurys.

That isn’t going to change overnight. Analysts have emphasized that investors don’t buy Treasurys based on the credit rating. And any outflows from funds that are required to hold only triple-A rated bonds are expected to be limited.

See: $25 trillion Treasury market is in the spotlight as U.S. loses its AAA rating for a second time

“Many major Treasury holders, such as funds and index trackers, have already prepared for the move by changing mandates to specifically refer to Treasurys rather than AAA credit, and are unlikely to be forced into selling given the importance of the asset class,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, in a Wednesday note.

How are markets reacting?

The downgrade was blamed for a weak tone across global equity markets, with U.S. stocks following suit. The Dow Jones Industrial Average
DJIA
dropped around 315 points, or 0.9%, while the S&P 500
SPX
shed 1.3%. The moves come after a strong run of gains, however.

Treasury yields, which move opposite to price, were higher. The selling, however, took hold only after data from ADP that showed a stronger-than-expected rise in private-sector payrolls. Treasurys took the downgrade in stride in earlier trading, with yields moving lower.

The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
was up around 2 basis points near 4.02%.

Marcelli recalled that in 2011 the yield on the 10-year U.S. Treasury fell around 50 basis points, or half a percentage point, in the three days after the S&P downgrade to 2.6% on Aug. 5. Even 15 trading days later, yields were still down 40 basis points from the day of the downgrade, and around 80 basis points lower compared with where they were 15 trading days before the move.

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August 2, 2023
Fitch slashes U.S. credit ratings to AA+ from AAA, points to ‘erosion’ of governance

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Fitch Ratings cut its top U.S. credit rating to AA+ from AAA on Tuesday, pointing to “erosion” of governance and the nation’s expected fiscal deterioration over the next three years.

Fitch said eroding governance in the U.S. over the past two decades was among the factors for its downgrade, in a Tuesday evening statement. It also said it expected the general government deficit to climb to 6.3% of gross domestic product in 2023, from 3.7% in 2022, on weaker federal revenues, new spending initiatives and a higher interest burden.

“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” Fitch said.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.”

Fitch warned in May that it might cut the U.S.’s AAA ratings as the latest debt-ceiling fight was dragging on for months without a resolution.

Borrowing costs have climbed as the Treasury Department has unleashed a flood of Treasury issuance since its June debt-ceiling deal to restock it coffers. The 1-month Treasury yield was at 5.36% on Tuesday, while auctions of other Treasury bills maturing in one year often kick off yields north of 5%.

See: ‘Eye-popping’ $1 trillion third-quarter borrowing need from U.S. Treasury raises risk of buyers’ fatigue

Stocks ended trade Tuesday nearing record levels, with the Dow Jones Industrial Average
DJIA,
+0.20%
and S&P 500 index
SPX,
-0.27%
both less than 5% off their highest closing levels from early 2022.

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August 1, 2023
Stocks are on a seemingly unstoppable hot streak, but this bond-market ‘tipping point’ could see it end in a hurry

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The S&P 500 index is on the verge of a fifth straight monthly gain in July. It’s a reality that few on Wall Street expected just eight months ago.

As a result, it seems that one by one, equity analysts at the big banks are issuing mea culpas or tweaking their S&P 500 targets.

With so many reconsidering their assumptions about markets and the economy, one analyst who has been bullish for months sees an opportunity to reflect on what Wall Street got wrong in 2023 — and by doing so, pinpoint potential existential threats to the rally that may lie ahead.

Jawad Mian, a longtime financial markets professional and the founder of Stray Reflections, said professional investors and economists generally underestimated just how resilient U.S. corporations, and U.S. consumers, and the broader U.S. economy would be to higher interest rates. At the same time, they failed to fully appreciate inflation’s ability to boost corporate profits over the long term.

So far, stocks have proved resilient to higher bond yields in 2023, but that doesn’t mean they always will be. Mian believes that rising real yields could eventually push past a “tipping point” that would send U.S. equity valuations sharply lower.

“I think what’s happening is we are collectively discovering how high interest rates can go before the economy breaks,” he said.

“I think the 10-year yield is heading toward 5%. But the nuanced take here is the path higher is not troublesome…however, at some point, we’ll reach a level that’s too much,” Mian added during a phone interview with MarketWatch.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.962%
stood at 3.955% on Friday.

Past the point of no return

The Federal Reserve pushed its policy interest-rate to its highest level in 22 years earlier this week, and further hikes certainly could push long-dated bond yields higher, Mian said. But the blow that drives markets over the cliff could easily come from somewhere else as well.

For example: Foreign investors, particularly those in Japan, could choose to dump U.S. Treasurys now that they’re being enticed by more attractive yields back home.

Investors received a small taste of what this might look like on Thursday afternoon when a headline about the Bank of Japan’s plans to loosen its grip on its government bond market sent the yield on the 30-year Treasury bond
TMUBMUSD30Y,
4.021%
north of 4%, sparking a selloff in stocks that led to the Dow Jones Industrial Average snapping a 13-day winning streak.

Yields on the 10-year Japanese government bond hit their highest levels since 2014 on Friday after the BOJ confirmed those reports during its July policy meeting.

See: Why U.S. stocks and bonds stumbled on talk of a Bank of Japan policy tweak

Corporate earnings are another puzzle

While it’s important for investors to monitor bond-market threats like this, yields don’t exist in a vacuum. Corporate earnings are another important piece of the puzzle.

Higher yields make bonds more attractive to investors, helping to dim the appeal of stocks, but they also increase borrowing costs for corporations, potentially cutting into profits and pushing companies to lay off employees or enact other belt-tightening measures.

The more pressure companies face from rising borrowing costs, they more likely they’ll need to take more cost-cutting measures like laying off employees.

“Generally speaking, if yields move higher that should put downward pressure on multiples. That’s a risk to the stock market for sure,” said James St. Aubin, chief investment officer for Sierra Investment Management, during a phone interview with MarketWatch.

For now at least, it looks like stocks could continue to ride this wave of momentum higher, even if valuations are looking somewhat stretched relative to recent history already, St. Aubin said. For this to continue though, corporate earnings will need to keep pace with increasingly optimistic expectations.

Already, stock valuations are looking lofty based on the price-to-earnings ratio, one of Wall Street’s favorite metrics for determining how expensive or cheap the market looks.

The forward 12-month price-to-earnings ratio for the S&P 500 index currently stands at 19.4. That’s already higher than the five-year average of 18.6, and the 10-year average of 17.4, according to FactSet data.

Right now, investors are willing to tolerate this because they expect corporate profits to grow substantially in the years ahead, even though profits are expected to contract by 7% in the quarter ended in June, bringing the stretch of negative earnings growth to a third straight quarter.

But in 2024, year-over-year earnings growth is expected to swell to 12.6%. If companies meet, or surpass, these expectations, stocks will likely hold on to their gains, if not continue to climb, St. Aubin said.

However, should earnings growth disappoint, a painful market reckoning might follow.

Since the start of 2023, U.S. stocks have nearly erased all of their losses from 2022, which was the worst year for stock-market performance since 2008, while bonds saw their biggest declines in decades as yields soared driven by inflation and the Federal Reserve’s aggressive interest-rate hikes. Since Jan. 1, the S&P 500
SPX,
+0.99%
has risen 19.3% to 4,582.23, according to FactSet.

The Nasdaq Composite
COMP,
+1.90%
has risen 36.8% to 14,316, while the Dow Jones Industrial Average
DJIA,
+0.50%
is up 7%.

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July 30, 2023
U.S. stocks end a volatile week higher as Dow industrials, S&P 500 notch 3rd straight week of gains

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U.S. stock indexes finished higher on Friday with the Dow Jones Industrial Average and the S&P 500 closing out their third winning week in a row, bolstered by better-than-expected earnings from megacap technology companies and hopes that the Federal Reserve will tame inflation by hiking interest rates aggressively without causing a recession. The Dow industrials
DJIA,
+0.50%
rose 176 points, or 0.5%, to end at 35,459, posting a weekly gain of 0.7%. The S&P 500
SPX,
+0.99%
advanced 1%, while the Nasdaq Composite
COMP,
+1.90%
rose over 2% for the week, according to Dow Jones Market Data. On Thursday, the blue-chip Dow snapped its longest winning streak since 1987 as U.S. Treasury yields
TMUBMUSD10Y,
3.956%
jumped after a news report said the Bank of Japan will discuss tweaking its yield-curve control policy at a policy board meeting on Friday. The Bank of Japan Friday said it would loosen its grip on yields of Japanese government bonds, a decision that pushed the yield on the 10-year JGB to its highest level since 2014, according to FactSet data.

In U.S. economic data, the personal consumption expenditures price index showed U.S. inflation eased 0.2% in June, compared with May’s increase of 0.3%. The rate of core inflation, which omits volatile food and energy prices, rose 4.1% in the last 12 months, down sharply from May’s 4.6% increase, but that still puts it at a more than two-year low. It’s still far above the Fed’s 2% target, however.

Meanwhile, consumer spending rose 0.5% in June in a sign of confidence as inflation eased again and the U.S. economy continued to grow.

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July 28, 2023
Why U.S. stocks and bonds stumbled on talk of a Bank of Japan policy tweak

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Worries about a possible policy tweak by the Bank of Japan threw a wet blanket on a stretched U.S. stock-market rally Thursday, with the Dow Jones Industrial Average snapping its longest winning streak since 1987 after the 10-year Treasury yield surged back above the 4% level.

The Japanese yen also strengthened after a news report said policy makers on Friday would discuss a possible tweak to the Bank of Japan’s so-called yield-curve control policy that would loosen the cap on long-dated government bond yields.

Nikkei, without citing sources, reported that BOJ officials would talk about the matter at Friday’s policy meeting and that the potential change would allow the yield on the 10-year Japanese government bond
TMBMKJP-10Y,
0.440%
to trade above its cap of 0.5% “to some degree.”

‘Ultimate fear’

Why is that a negative for U.S. Treasurys and, in turn, U.S. stocks?

The “ultimate fear” is that Japanese investors, who have vast holdings of U.S. fixed income, including Treasury notes and other securities, “begin to see a higher level of yields in their own backyard,” Torsten Slok, chief economist at Apollo Global Management, told MarketWatch in a phone interview. That could prompt heavy liquidation of those U.S. positions as investors repatriate holdings to reinvest the proceeds at home.

That dynamic explains the knee-jerk reaction that saw the 10-year U.S. Treasury yield
TMUBMUSD10Y,
4.004%
surge more than 16 basis points to end above 4%, he said. Yields rise as debt prices fall.

The surge in yields, in turn, saw stocks give up early gains, with U.S. indexes ending lower across the board.

What is yield curve control?

The Bank of Japan began implementing yield curve control, or YCC, in 2016, a policy that aims to keep government bond yields low while ensuring an upward-sloping yield curve. Under YCC, the BOJ buys whatever amount of JGBs is necessary to ensure the 10-year yield remains below 0.5%.

Nikkei said a possible tweak would allow gradual increases in the yield above 0.5%, but would clamp down on any sudden spikes, allowing the BOJ to rein in fluctuations driven by speculators.

Global market participants are sensitive to changes in YCC. The BOJ sent shock waves through markets in December when it lifted the cap from 0.25% to 0.5%. Investors were rattled by the prospect of the Bank of Japan giving up its role as the remaining low-rate anchor among major central banks.

BOJ Gov. Kazuo Ueda in May said the bank would start shrinking its balance sheet and end its yield-curve control policy if a 2% inflation looks achievable and sustainable after many years of undershooting.

Yen rallies

The yield on the 10-year JGB has traded above 0.4%, but remained below the 0.5% cap. Continued interest rate rises by the Federal Reserve and other major central banks in the past year have raised worries that the 10-year JGB yield could test the limit, Nikkei reported. Those rate hikes, meanwhile, have added pressure to the yen, whose weakness is seen contributing to inflation pressures.

The yen
USDJPY,
-0.02%
strengthened following the report. The U.S. dollar was off 0.5% versus the currency, fetching 139.48 yen.

The Dow Jones Industrial Average
DJIA,
-0.67%
ended the day down nearly 240 points, or 0.7%, snapping a 13-day winning streak, while the S&P 500
SPX,
-0.64%
declined 0.6% and the Nasdaq Composite
COMP,
-0.55%
lost 0.5%.

Japanese stocks have solidly outpaced strong gains for U.S. equities in 2023, with the Nikkei 225
NIK,
+0.68%
up 26% so far this year versus an 18.7% rise for the S&P 500.

See: Japan’s stock market is roaring 25% higher. These 4 things could keep the rally going.

What’s next

Investors are waiting to see what the Bank of Japan actually has to say.

While the Nikkei report helped “exaggerate” a selloff in Treasurys, the market may be inoculated against bigger swings after the BOJ’s December adjustment to the rate band, said Ian Lyngen and Benjamin Jeffery, rates strategists at BMO Capital Markets, in a note.

The analysts said they expect that “the magnitude of the follow through repricing in U.S. rates will be comparatively more contained than would otherwise be expected.”

More recently, the weak yen has raised the cost of hedging long Treasury positions for Japanese investors. So a stronger yen resulting from a shift toward tighter policy would help make hedging costs for owning Treasurys less onerous for Japanese investors as well, Lyngen and Jeffery wrote, “which over the longer term may begin to make Treasurys more attractive to Japanese buyers and add to the list of sources for duration demand.”

That could make U.S. debt more attractive to new Japanese buyers, Slok agreed.

But that’s oveshadowed by the near-term worry, Slok said, that existing Japanese investors will be inclined to sell Treasurys. Flow data will be very much in focus if the Bank of Japan follows through on the apparent trial balloon floated in the Nikkei report.

Investors will be watching, he said, to see “if the train is leaving the station.”

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July 27, 2023