Tag: U.S. 30 Year Treasury Bond

Why stock-market investors will remain at mercy of shifting rate-cut expectations after wobbly start to 2024

Stock investors have gotten off to a wobbly start to the new year, hobbled by shifting expectations on the timing and extent of Federal Reserve interest-rate cuts in 2024.

All three major U.S. stock indexes snapped a nine-week winning streak on Friday, after unexpectedly strong December job gains prompted traders to briefly pull back on the chances of a March rate cut. The S&P 500
SPX
and Nasdaq Composite
COMP
also failed to stage a Santa Claus Rally from the five final trading days of 2023 through the first two sessions of 2024, as questions grew about the market’s multiple rate-cuts view.

It all adds up to a glimpse of what might be in store for investors in the year ahead. Already, the so-called “January effect,” or theory that stocks tend to rise by more now than any other month, could be put to the test by headwinds that include stalling progress on inflation. Inflation’s downward trend in recent months had given traders and investors hope that as many as six or seven quarter-percentage-point rate cuts from the Federal Reserve could be delivered in 2024, starting in March.

Over the first handful of days in the new year, however, reality has started to sink in. For one thing, multiple rate cuts tend to be more commonly associated with recessions and not soft landings for the economy.

Moreover, the idea that the Fed could follow through with as many rate cuts as envisioned by traders would significantly increase the probability that policymakers lose their battle against inflation, according to Mike Sanders, head of fixed income at Wisconsin-based Madison Investments, which manages $23 billion in assets. That’s because six or more rate cuts would loosen financial conditions by too much, and boost the risk of another bout of inflation that forces officials to hike again, he said.

Minutes of the Fed’s Dec. 12-13 meeting show that policymakers were uncertain about their forecasts for rate cuts this year and failed to rule out the possibility of further rate hikes. Nonetheless, fed funds futures traders continued to cling to expectations for a big decline in borrowing costs, with the greatest likelihood now coalescing around five or six quarter-point rate cuts that total 125 or 150 basis points of easing by year-end. That’s roughly twice as much as what policymakers penciled in last month, when they voted to keep interest rates at a 22-year high of 5.25% to 5.5%.

Source: CME FedWatch Tool, as of Jan. 5.

Uncertainty over the path of U.S. interest rates could leave investors flat-footed once again, and damp the optimism that sent all three major stock indexes in 2023 to their best annual performances of the prior two to three years. In November, analysts at Deutsche Bank AG
DB,
+0.81%
counted seven times since 2021 in which markets expected the Fed to make a dovish pivot, only to be wrong.

Sources: Bloomberg, Deutsche Bank. Chart is as of Nov. 20, 2023.

Financial markets have been operating with “sky-high expectations” for 2024 rate cuts, but the only way to substantiate six cuts this year is with an “abrupt and sharp downturn in the economy,” said Todd Thompson, managing director and portfolio co-manager at Reams Asset Management in Indianapolis, which oversees $27 billion.

Heading into 2024, euphoria over the prospect of lower borrowing costs produced what Thompson calls “an alarming, everything rally,” which he says leaves equities and high-yield corporate debt vulnerable to pullbacks between now and the next six months. Beyond that period, however, “the trend is likely to be lower rates as the economy finally succumbs to tightening conditions at the same time inflation continues to recede.”

The coming week brings the next major U.S. inflation update, with December’s consumer price index report released on Thursday. The annual headline rate of inflation from CPI has slowed to 3.1% in November from a peak of 9.1% in June 2022. In addition, the core rate from the Fed’s favorite inflation gauge, known as the PCE, has eased to 3.2% year-on-year in November from a 4.2% annual rate in July.

The Fed needs to keep interest rates higher because of all the uncertainty around inflation’s most likely path forward, and the U.S. labor market “won’t degrade fast enough in the first quarter to justify a first rate cut in March,” according to Sanders of Madison Investments.

Rate-cut expectations are “going to be the issue for 2024, and a lot of it is going to be revolving around inflation getting back to that 2% target,” Sanders said via phone. “We think somewhere between 75 and 125 basis points of rate cuts make sense, and that the first move is more of a June-type of event. We don’t think it makes sense to have a March rate cut unless the labor market falls off a cliff.”

History shows that Treasury yields tend to fall in the months leading up to the first rate cut of a Fed easing cycle. However, that isn’t happening right now. Yields on government debt have been on an upward trend since the end of December, with 2-
BX:TMUBMUSD02Y,
10-
BX:TMUBMUSD10Y,
and 30-year yields
BX:TMUBMUSD30Y
ending Friday at their highest levels in more than two to three weeks.

See also: What history says about stocks and the bond market ahead of a first Fed rate cut

While financial markets generally tend to be efficient processors of information, they “haven’t been very accurate in terms of pricing in rate cuts” this time, said Lawrence Gillum, the Charlotte, North Carolina-based chief fixed-income strategist for broker-dealer for LPL Financial. He said the big risk for 2024 is if financial conditions ease too much and the Fed declares victory on inflation too soon, which could reignite price pressures in a manner reminiscent of the 1970s period under former Fed Chairman Arthur Burns.

“We think rate-cut expectations have gone too far too fast, and that the backup in yields we are seeing right now is the market acknowledging that maybe rate cuts are not going to be as aggressive as what was priced in,” Gillum said via phone.

December’s CPI report on Thursday is the data highlight of the week ahead.

On Monday, consumer-credit data for November is set to be released, followed the next day by trade-deficit figures for the same month.

Wednesday brings the wholesale-inventories report for November and remarks by New York Fed President John Williams.

Initial weekly jobless claims are released on Thursday. On Friday, the producer price index for December comes out.

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January 7, 2024
This week's Fed meeting could slam brakes on year-end stock rally

The rally lifting U.S. stocks to fresh 2023 highs in the year’s home stretch could be at risk if the Federal Reserve on Wednesday crushes expectations for interest-rate cuts in 2024.

U.S. central bankers and investors haven’t exactly been seeing eye-to-eye about when the Fed will start easing its monetary policy, according to Melissa Brown, senior principal of applied research at Axioma.

Traders also have been flip-flopping on their forecasts for rate cuts over the past few months, based on fed-funds futures data.

Oxford Economics/Bloomberg

Given the whipsaw of recent volatility, it isn’t hard to imagine a jittery market backdrop as investors wait to hear from Fed Chairman Jerome Powell on Wednesday, even though the central bank isn’t expected to change its range for short-term interest rates. Since July, the Fed funds rate rate has been at a 22-year high in a 5.25% to 5.5% range.

U.S. stocks advanced this year after a bruising 2022, adding big gains in November, as benchmark 10-year Treasury yields
BX:TMUBMUSD10Y
tumbled from a 16-year high of 5%. The Dow Jones Industrial Average
DJIA
closed on Friday only 1.5% away from its record close nearly two years ago. The S&P 500 index
SPX
booked its highest finish since March 2022, according to Dow Jones Market Data.

Year Ahead: The VIX says stocks are ‘reliably in a bull market’ heading into 2024. Here’s how to read it.

“I don’t see any report on the horizon that would really make them [the Fed] change their stance on where we are on monetary policy,” said Alex McGrath, chief investment officer at NorthEnd Private Wealth. It is mostly the expectation of Fed rate cuts next year that have supported stock and bond markets rallies recently, he said.

The Dow Jones closed 9.4% higher on the year through Friday, the S&P 500 was up 19.9% and the Nasdaq Composite advanced 37.6% for the same period, according to FactSet data.

“We have been a little skeptical of the market’s excitement over rate cuts early next year,” said Ed Clissold, chief U.S. strategist at Ned Davis Research.

It takes a gradual process for the Fed to move away from its monetary policy tightening, Clissold told MarketWatch. The Fed is likely to pivot its tone from being very hawkish to neutral, remove the tightening bias, and then talk about rate cuts, noted Clissold.

The bond market on Friday already was again flashing signs of a potential rethink by investors about the path of interest rates in 2024.

Junk bonds
JNK

HYG,
often a canary in the coal mine for markets, hit pause on a rally that started in late October as benchmark borrowing costs fell, even though the sector has benefited from big inflows of funds in recent weeks.

Treasury yields for 10-year and 30-year
BX:TMUBMUSD30Y
bonds also shot higher Friday, echoing volatility that took hold in mid-October.

Read: Investors have fought a 2-year battle with the bond market. Here’s what’s next.

Mike Sanders, head of fixed income at Madison Investments, has been similarly cautious. “I think the market is a little too aggressive in terms of thinking that cuts are going to occur in March,” Sanders said. It is more likely that the Fed will start cutting rates in the second half of next year, he said.

“I think the biggest thing is that the continued strength in the labor market continues to make the services inflation stickier,” Sanders said. “Right now we just don’t see the weakness that we need to get that down.”

Friday’s U.S. employment report adds to his concerns. About 199,000 new jobs were created in November, the government said Friday. Economists polled by the Wall Street Journal had forecast 190,000 jobs. The report also showed rising wages and a retreating unemployment rate to a four-month low of 3.7% from 3.9%.

The U.S. central bank will likely “try their best to push back on the narrative of cuts coming very soon,” Sanders said. That could be accomplished in its updated “dot plot” interest rate forecast, also due Wednesday, which will provide the Fed’s latest thinking on the likely path of monetary policy. The Fed’s update in September surprised some in the market as it bolstered the central bank’s stance of higher rates for longer.

There’s still a chance that inflation will reaccelerate, Sanders said. “The Fed is worried about the inflation side more than anything else. For them to take the foot off the brake sooner, it just doesn’t do them any good.”

Ahead of the Fed decision, an inflation update is due Tuesday in the November consumer-price index, while the producer-price index is due Wednesday.

Still, seasonality factors could aid the stock market in December. The Dow Jones Industrial Average in December rises about 70% of the time, regardless of whether it is in a bull or bear market, according to historical data.

See: Stock market barrels into year-end with momentum. What that means for December and beyond.

“The overall market outlook remains constructive,” said Ned Davis’s Clissold. “A soft landing scenario could support the bull market continuing.”

Last week the Dow eked out a gain of less than 0.1%, the S&P 500 edged up 0.2% and the Nasdaq rose 0.7%. All three major indexes went up for a sixth straight week, with the Dow logging its longest weekly winning streak since February 2019, according to Dow Jones Market Data.

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December 10, 2023
Mortgage rates' dip to 7% could be brief if jobs market stays strong, Fannie Mae economist says

November’s sharp pullback in 30-year fixed mortgage rates may not last if the labor market remains strong, said Mark Palim, deputy chief economist at Fannie Mae.

Palim was speaking to the robust jobs report released on Friday, showing the U.S. added 199,000 jobs in November and that wages rose, albeit with the figures somewhat inflated by the return of striking workers from the auto industry and from Hollywood.

Homebuyers can benefit from a robust labor market and the near 80 basis point decline in mortgage rates since the end of October, Palim said. But if the “labor markets remain this strong, we believe the pace of mortgage rate declines will likely not continue in the near term or may partially reverse,” he said in a statement.

The benchmark 30-year fixed mortgage rate was edging down to 7.05% on Friday, after surging to nearly 8% in October, according to Mortgage Daily News.

Optimism around the potential for falling mortgage costs to thaw home sales helped lift shares of Toll Brothers Inc.,
TOL,
+1.86%
and a slew of other homebuilders tracked by the SPDR S&P Homebuilders ETF,
XH,
to record highs earlier this week, even while investors in some homebuilder bonds have been sellers in recent weeks.

Yields on 10-year
BX:TMUBMUSD10Y
and 30-year Treasury notes
BX:TMUBMUSD30Y
were up sharply Friday, to about 4.23% and 4.32%, respectively, but still below the highs of about 5% in October. The surge in long-term borrowing costs was stoked by tough talk by Federal Reserve officials about the need to keep rates higher for longer to bring inflation down to a 2% annual target.

Read: Solid job growth, sharp wage gains sends Treasury yields up by the most in months

U.S. stocks were up Friday afternoon, shaking off earlier weakness following the jobs report. The Dow Jones Industrial Average
DJIA
was 0.2% higher, further narrowing the gap between its last record close set two years ago, the S&P 500 index
SPX
and the Nasdaq Composite Index
COMP
also were up 0.2%, according to FactSet data.

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December 8, 2023
November's rally just erased two months of Fed tightening, economist says

Financial conditions are now looser than in September, says economist

Financial conditions in the U.S. are looser than in September, says economist.

Getty Images

The feel-good tone gripping markets in the home stretch of 2023 may not be what the Federal Reserve had penciled in for the holidays.

The stock market in December, once again, has been knocking on the door of record levels, driven by optimism about easing inflation and potential Fed rate cuts next year.

But while the prospect of double-digit equity gains this year would be a reprieve for investors after a brutal 2022, the latest rally also points to looser financial conditions.

Ultimately, the risk of looser financial conditions is that they could backfire, particularly if they rub against the Fed’s own goal of keeping credit restrictive until inflation has been decisively tamed.

Read: Inflation is falling but interest rates will be higher for longer. Way longer.

Specifically, the November rally for the S&P 500 index
SPX
can be traced to the 10-year Treasury yield
BX:TMUBMUSD10Y
dropping to 4.1% on Thursday from a 16-year peak of 5% in October.

Falling 10-year Treasury yields from a 5% peak in October coincides with a sharp rally in the S&P 500 at the tail end of 2023.

Oxford Economics

The Fed only exerts direct control over short-term rates, but 10-year and 30-year Treasury yields
BX:TMUBMUSD30Y
are important because they are a peg for pricing auto loans, corporate debt and mortgages.

That makes long-term rates matter a lot to investors in stocks, bonds and other assets, since higher rates can lead to rising defaults, but also can crimp corporate earnings, growth and the U.S. economy.

Michael Pearce, lead U.S. economist at Oxford Economics, thinks the November rally may put Fed officials in a difficult spot ahead of next week’s Dec. 12 to 13 Federal Open Market Committee meeting — the eighth and final policy gathering of 2023.

“The decline in yields and surge in equity prices more than fully unwinds the tightening in conditions seen since the September FOMC meeting,” Pearce said in a Thursday client note.

The Fed next week isn’t expected to raise rates, but instead opt to keep its benchmark rate steady at a 22-year high in a 5.25% to 5.5% range, which was set in July. The hope is that higher rates will keep bringing inflation down to the central bank’s 2% annual target.

Ahead of the Fed’s July meeting, stocks were extending a spring rally into summer, largely driven by shares of six meg-cap technology companies and AI optimism.

From June: Nvidia officially closes in $1 trillion territory, becoming seventh U.S. company to hit market-cap milestone

Rates in September were kept unchanged, but central bankers also drove home a “higher for longer” message at that meeting, by penciling in only two rate cuts in 2024, instead of four earlier. That spooked markets and triggered a string of monthly losses in stocks.

Pearce said he expects the Fed next week to “push back against the idea that rate cuts could come onto the agenda anytime soon,” but also to “err on the side of leaving rates high for too long.”

That might mean the first rate cut comes in September, he said, later than market odds of a 52.8% chance of the first cut in March, as reflected by Thursday by the CME FedWatch Tool.

Stocks were higher Thursday, poised to snap a three-session drop. A day earlier, the S&P 500 closed 5.2% off its record high set nearly two years ago, the Dow Jones Industrial Average
DJIA
was 2% away from its record close and the Nasdaq Composite Index
COMP
was almost 12% below its November 2021 record, according to Dow Jones Market Data.

Related: What investors can expect in 2024 after a 2-year battle with the bond market

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December 7, 2023
How ransomware attack on ICBC rattled the Treasury market and shook up a 30-year bond auction

It was a trading day unlike any other for traders in the $25 trillion Treasury market, with a 30-year bond auction seen as having been partially undermined by a cyberattack on the U.S. unit of a Chinese bank.

In recapping Treasury’s poorly received $24 billion bond auction on Thursday, traders said the weaker-than-expected results likely had at least something to do with this week’s ransomware hit on the American arm of Industrial & Commercial Bank of China, known as ICBC. That attack reportedly caused disruptions across the market and had some impact on liquidity, with the Financial Times citing unnamed sources as saying hedge funds and asset managers were forced to reroute trades.

Traders were grappling on Friday to answer the question of what created the sudden lack of interest at the auction, which went so badly that it also shook up U.S. stock investors. Thursday’s sale was the worst since November 2021, based on the extent to which primary dealers were forced to step in and pick up the slack in demand, one trader said. And it reinforced a recent pattern of weak auctions for the 30-year bond that may not bode well for future sales of that long-dated maturity.

It’s possible that bonds simply “look much less attractive” following a recent “explosive rally” since late October, according to Charlie McElligott, a cross-asset macro strategist at Nomura Securities in New York. However, “this might be the case of ‘more than meets the eye’ to this ‘ugly auction evidencing low demand for duration’ story,” he wrote in a note.

“One dynamic that makes yesterday’s ugly auction results murky was the ICBC cyberattack described across various financial media, which gunked-up anybody who clears UST trades through them, and made it so that many dealers were then likely unable to trade with those clients until resolved, on account of unsettled trades which weren’t able to be matched,” McElligott said.

Adding to Thursday’s uncertainty was another random event. Federal Reserve Chairman Jerome Powell appeared on stage in an International Monetary Fund panel, was interrupted by a climate protester, and then uttered a seven-letter expletive that could be heard on the event’s livestream.

Powell’s policy-related remarks, which indicated the central bank might take further action to control inflation, “didn’t help things and kind of spooked people again,” said John Farawell, head of municipal trading at New York bond underwriter Roosevelt & Cross.

Read: Fed’s Powell Made Cryptic Comments. How He’s Guiding the Market.

On Friday, the Treasury market found stabilization as buyers returned to segments of government debt in a sign that calm was being restored. A rush of buying was seen on the 30-year bond
BX:TMUBMUSD30Y,
sending its yield down to 4.733% and to a third straight weekly decline.

Meanwhile, Bloomberg News reported that the repercussions of the ICBC cyberattack included an inability to deliver U.S. debt that was being pledged as collateral. ICBC’s U.S. unit was forced to rely on a messenger carrying a USB stick across Manhattan to complete disrupted trades, according to the news service, which also described Thursday’s $24 billion 30-year bond auction as one of the worst in a decade.

The ICBC attack “might have had a dramatic impact on the auction. I don’t know how much, but I also can’t imagine it didn’t,” said Tom di Galoma, co-head of global rates trading for BTIG in New York. “When people see that there are trade-settlement issues, there’s a willingness to back off and that’s exactly what happened yesterday. Institutional accounts were saying, ‘We don’t know who is settling this trade.’ If the cyberattack hadn’t happened, I think the auction would have gone a lot better.”

Ben Emons, a senior portfolio manager and head of fixed income for NewEdge Wealth in New York, said that once the Treasury market got upended by the ICBC cyberattack, the bad auction, and the interruption during Powell’s appearance, liquidity on U.S. government debt “was, for a moment, a dark matter.”

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November 10, 2023
Treasury’s $24 billion 30-year bond auction goes poorly, trader says

Thursday afternoon’s $24 billion sale of 30-year Treasury bonds drew weaker-than-expected demand, according to Greg Faranello, head of U.S. rates trading and strategy at AmeriVet Securities in New York, citing the bid-to-cover ratio and yield concession which came in. The 1 p.m. Eastern time auction caps a trio of sales that have taken place since Tuesday, totaling $112 billion, and which were seen as important tests of demand. Treasury yields moved up slightly after the Thursday’s auction results came out, reflecting a further selloff in underlying government debt.

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November 9, 2023
Why strategists see 10-year Treasury yield breaching 5% despite Friday’s pullback

The 10-year Treasury yield continued to pull back from 5% on Friday after moving tantalizingly close to surpassing that level in the previous session.

The yield touched 5% at 5:02 p.m. Eastern time on Thursday, only to drift back down, according to Tradeweb data. It ended Friday’s New York session down by 6.3 basis points at 4.924%.

Rising Middle East tensions gave way to renewed safe-haven demand in government debt on Friday that not only sent the 10-year yield
BX:TMUBMUSD10Y
lower, but dragged down rates on everything from 3-month Treasury bills
BX:TMUBMUSD03M
to the 30-year bond
BX:TMUBMUSD30Y.

Investors were trying to catch the proverbial falling knife by taking advantage of a cheaper 10-year Treasury note, the product of recent selloffs. Analysts warn that it’s difficult to have much short-term conviction in catching that knife, however, given the likelihood that the selloff could return.

One big reason is the onslaught of new supply from the U.S. Treasury as the result of the government’s growing borrowing needs, which is raising the risk that investors will keep demanding more compensation to hold long-dated debt to maturity.

On Oct. 30 and Nov. 1, which is the same day as the Federal Reserve’s next policy decision, Treasury is expected to provide updated guidance on its borrowing needs and auction sizes. Treasury’s refunding announcement could even upstage the Federal Open Market Committee — creating “fertile ground for a continuation of the selloff in Treasuries,” said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery.

Over the next several weeks, “it becomes much easier to envision a surge in Treasury yields in anticipation of the upcoming coupon supply,” they wrote in a note on Friday. While the 10-year yield has stopped shy of 5%, “we continue to expect this milestone will be reached shortly.”

Stock-market investors have been focused on the prospects of a 5% 10-year yield because such a level would dent the appeal of equities and make government debt a more attractive investment by comparison.

Read: Why stock-market investors are fixa t ed on 5% as 10-year Treasury yield nears key threshold

As of Friday, the 10-year yield, used as the benchmark on everything from mortgages to student and auto loans, has jumped 163.9 basis points from its 52-week low of almost 3.29% reached on April 5. The 10-year yield hasn’t ended the New York session above 5% since July 19, 2007.

Meanwhile, all three major stock indexes
DJIA

SPX

COMP
ended the day lower as the prospects of a widening conflict in the Middle East triggered a flight-to-safety trade into Treasurys.

Taking a step back, a 5% 10-year yield would imply that a Goldilocks-scenario of a U.S. economy — one that’s neither too hot or too cold, and able to sustain moderate growth — “is here to stay for a decade,” or that the Fed’s main interest-rate target needs to be materially higher on average over the next decade, according to BMO’s Lyngen and Jeffery. One of the biggest questions facing policy makers is whether the economy might be moving into a new stage in which even higher interest rates down the road could be required to cool demand and activity.

Though BMO Capital Markets is biased toward lower yields into the weekend given the absence of major economic data on Friday, technical indicators “continue to favor higher rates in the near-term,” and “our conviction that 5% will ultimately be traded through has grown.”

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October 20, 2023
Selloff in Treasurys gains momentum in late afternoon, pushing 3-month through 30-year yields either further above or toward 5%

Tuesday’s selloff in U.S. government debt picked up steam in the late afternoon, sending most Treasury yields either further above or toward 5%. The jump in market-implied rates was led by 3- through 7-year yields, which each rose by 17 basis points, according to FactSet data. The benchmark 10-year rate was up 14.4 basis points at 4.853% after September’s stronger-than-expected retail sales report, and is on pace for its largest one-day jump since at least Sept. 21. Two- and 10-year yields are both heading for their highest closing levels in 16 to 17 years.

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October 17, 2023
Homes are expensive right now, but these mortgage bonds look cheap

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

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

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

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

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

Bloomberg, Goldman Sachs Global Investment Research

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

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

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

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

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

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

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

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

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

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

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

Janus Henderson Investors

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

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

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

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

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

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October 13, 2023
‘Fear trade’: What Israel-Hamas war means for oil prices and financial markets

Oil traders on Sunday said crude prices were likely to remain supported in the near term, as investors assessed the fallout from the surprise attack by Hamas on Israel and focused on the role played by Iran and the potential impact on that country’s petroleum exports.

The conflict may also hold market-moving consequences for talks aimed at normalizing relations between Saudi Arabia and Israel.

“While in the short term there is no impact directly on supply, it’s obvious how things play out over the next 24 to 48 hours could change that,” Phil Flynn, an analyst at Price Futures Group in Chicago, told MarketWatch.

Brent crude futures
BRN00,
+4.17%,
the global benchmark, and West Texas Intermediate oil futures
CL00,
+4.35%

CL.1,
+4.35%
jumped more than 3% when the market opened Sunday night. U.S. stock-index futures
ES00,
-0.66%
traded lower, while traditional havens, including gold
GC00,
+0.98%
and the U.S. dollar
DXY
rose.

Movements in oil prices, meanwhile, will also serve as a gauge for broader market worries around the conflict, analysts said.

See: Israeli stocks slump in first day of trade since Gaza attack

Hamas, the Iran-backed, Palestinian militant group that controls the Gaza Strip, staged a sweeping attack on southern Israel early Saturday. News reports put Israeli deaths at more than 700. The Gaza Health Ministry said 413 people, including 78 children and 41 women, were killed in the territory as Israel retaliated, according to the Associated Press. Injuries in Israel and Gaza were both said to be around 2,000.

Israeli troops on Sunday were engaged in fierce fighting in an effort to retake territory in southern Israel as Hamas launched further barrages of missiles. Israeli citizens and soldiers were captured and are being held hostage in Gaza, according to the Israeli military.

Read: Israel declares war, approves ‘significant’ steps to retaliate after surprise attack by Hamas

The Wall Street Journal reported that Iranian security officials helped Hamas plan the attack. U.S. officials said they haven’t seen evidence of Iran’s involvement, the report said.

“Iran remains a very big wild card and we will be watching how strongly [Israeli] Prime Minister Netanyahu blames Tehran for facilitating these attacks by providing Hamas with weapons and logistical support,” said Helima Croft, head of global commodity strategy at RBC Capital Markets, in a Sunday morning note.

Iranian crude exports have risen in recent years, indicating the Biden administration has adopted a soft approach to sanctions enforcement, Croft said. Some analysts have put Iranian crude production at more than 3 million barrels a day and exports above 2 million barrels a day — the highest levels since the Trump administration pulled the U.S. out of the Iranian nuclear accord in 2018, according to the Wall Street Journal. Sales fell to around 400,000 barrels a day in 2020 as the U.S. reimposed sanctions.

RBC Capital Markets

Hedge-fund manager Pierre Andurand, one of the world’s best energy traders, said in a social-media post that a large price spike for oil isn’t likely in coming days, but emphasized the market focus on Iran.

“Now, over the last six months we have seen a very large increase in Iranian supply due to weak enforcement of sanctions. As Iran is also behind Hamas’ attacks on Israel, there is a good probability that the U.S. administration will start enforcing those sanctions on Iranian oil exports more tightly,” he wrote. “That would further tighten the oil market. Also the probability that this will lead to direct conflict with Iran is not zero.”

Meanwhile, the Wall Street Journal late Friday reported that Saudi Arabia had told the White House it would be willing to boost oil production next year if crude prices remained high, as part of an effort aimed at winning goodwill in Congress for a deal that would see the kingdom recognize Israel and in return get a defense agreement with the U.S.

A Saudi production cut of 1 million barrels a day that was implemented in July and recently extended through the end of the year has been given much of the credit for a rally that took global benchmark Brent crude within a few dollars of the $100-a-barrel threshold before retreating this past week. The U.S. benchmark last week briefly topped $95 a barrel for the first time in 13 months.

In a statement, Saudi Arabia’s foreign ministry called on both sides to halt the escalation and exercise restraint, but also recalled its “repeated warnings of the dangers of the explosion of the situation as a result of the continued occupation, the deprivation of the Palestinian people of their legitimate rights, and the repetition of systematic provocations against its sanctities.”

With the Israeli government vowing an unprecedented response, “it is hard to envision how Saudi normalization talks can run on a parallel track to a ferocious military counteroffensive,” said RBC’s Croft.

Beyond oil, much will depend on the potential for the conflict to widen.

Stocks have stumbled, retreating from 2023 highs set in late July, as yields on U.S. Treasurys have jumped. The yield on the 30-year Treasury bond
BX:TMUBMUSD30Y
rose 23.2 basis points last week to end Friday at 4.941%, its highest since Sept. 20, 2007. The 10-year Treasury note yield
BX:TMUBMUSD10Y
topped 4.80% on Oct. 3, its highest since Aug. 8, 2007, and ended the week at 4.783%. Yields and debt prices move opposite each other.

The U.S. bond market will be closed Monday for the Columbus Day and Indigenous People’s Day holiday, while U.S. stock markets will be open.

The S&P 500 index
SPX
rose 0.5% last week, breaking a streak of four straight weekly declines, while the Dow Jones Industrial Average
DJIA
fell 0.3% and the Nasdaq Composite
COMP
gained 1.6%.

“I think there will be a negative reaction. However, I don’t see a meltdown,” Peter Cardillo, chief market economist at Spartan Capital Securities, told MarketWatch.

Traditional haven plays, including gold, the dollar and U.S. Treasurys may see a strong move upward, with price gains for Treasurys pulling yields down.

“Geopolitical crises in the Middle East have usually caused oil prices to rise and stock prices to fall,” said economist Ed Yardeni, president of Yardeni Research Inc., in a note. “More often than not, they’ve also tended to be buying opportunities in the stock market.”

The broader market reaction will depend on whether the crisis turns out to be a short-term flare-up or “something much bigger, like a war between Israel and Iran,” he said. The latter is unlikely, but tensions between the two are likely to escalate.

“The price of oil may be a good way to assess the likelihood of a broader conflict,” he said.

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October 8, 2023
U.S. stocks staged a surprising rally on Friday. But can the party last?

U.S. stocks saw a surprising bounce on Friday, culminating in the S&P 500 index’s biggest intraday comeback since the March banking crisis, even though a monthly jobs report for September came in much higher than expected.

So, are investors no longer worried about the Federal Reserve’s inflation fight or higher interest rates wrecking the U.S. economy?

“Stocks initially sold off on the blockbuster jobs report which indicates the Fed may not be done,” said Gina Bolvin, president of Bolvin Wealth Management Group. “However, after digesting the strong labor market is still strong, stocks rallied. And why shouldn’t they? Will good news- finally – be good news?”

Bolvin said part of the rally could be seasonal, with September typically being a rough months for stocks. There also has been increased optimism that the earnings recession for American corporations may be over, she said.

Analysts are predicting corporate earnings growth rates of 5.9% for the fourth quarter for S&P500 companies, according to John Butters, senior earnings analyst at FactSet. Estimates are for the third-quarter of 2023 after the stock index’s fourth straight quarterly earnings decline on a year-over-year basis.

At Friday’s session lows, the S&P 500 index
SPX
was down 0.9%, but it ended up posting a 1.2% advance, its largest intraday comeback since March 24, 2023, according to Dow Jones Market Data. The Dow Jones Industrial Average
DJIA
booked a 0.9% gain and the Nasdaq Composite Index
COMP
rose 1.6% higher.

“The movement in stocks today is certainly encouraging given yields are up as well,” said Chris Fasciano, portfolio manager, Commonwealth Financial Network. “But we will need to see follow through next week.”

The yield on 10-year Treasury
BX:TMUBMUSD10Y
note rose for five straight weeks in a row to 4.783% on Friday, while the 30-year yield
BX:TMUBMUSD30Y
rose to 4.941%, according to Dow Jones Market Data.

Read: Why 5% bond yields could wreak havoc on the market

While the U.S. stock-market will be open for business on Monday, the bond market will be closed for Columbus Day and Indigenous Peoples Day holiday, giving investors somewhat of a pause before a big week of economic data that could shape the Fed’s next decision on interest rates.

“Ultimately, stocks and bonds will take their cues next week from the economic releases,” Fasciano told MarketWatch.

Key items on the calendar for the week will be September inflation reports, with the producer-price index on Wednesday and the consumer-price index due Thursday. In between, Fed minutes of its policy meeting in September also are due to be released Wednesday.

“That makes next week an important week for the future direction of both the bond and equity markets as the Fed will certainly be focused on those reports prior to their next meeting on Oct. 31-Nov. 1,” Fasciano said.

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October 8, 2023
U.S. stocks stage a surprising rally on Friday. But can the party last?

U.S. stocks saw a surprising bounce on Friday, culminating in the S&P 500 index’s biggest intraday comeback since the March banking crisis, even though a monthly jobs report for September came in much higher than expected.

So, are investors no longer worried about the Federal Reserve’s inflation fight or higher interest rates wrecking the U.S. economy?

“Stocks initially sold off on the blockbuster jobs report which indicates the Fed may not be done,” said Gina Bolvin, president of Bolvin Wealth Management Group. “However, after digesting the strong labor market is still strong, stocks rallied. And why shouldn’t they? Will good news- finally – be good news?”

Bolvin said part of the rally could be seasonal, with September typically being a rough months for stocks. There also has been increased optimism that the earnings recession for American corporations may be over, she said.

Analysts are predicting corporate earnings growth rates of 5.9% for the fourth quarter for S&P500 companies, according to John Butters, senior earnings analyst at FactSet. Estimates are for the third-quarter of 2023 after the stock index’s fourth straight quarterly earnings decline on a year-over-year basis.

At Friday’s session lows, the S&P 500 index
SPX
was down 0.9%, but it ended up posting a 1.2% advance, its largest intraday comeback since March 24, 2023, according to Dow Jones Market Data. The Dow Jones Industrial Average
DJIA
booked a 0.9% gain and the Nasdaq Composite Index
COMP
rose 1.6% higher.

“The movement in stocks today is certainly encouraging given yields are up as well,” said Chris Fasciano, portfolio manager, Commonwealth Financial Network. “But we will need to see follow through next week.”

The yield on 10-year Treasury
BX:TMUBMUSD10Y
note rose for five straight weeks in a row to 4.783% on Friday, while the 30-year yield
BX:TMUBMUSD30Y
rose to 4.941%, according to Dow Jones Market Data.

Read: Why 5% bond yields could wreak havoc on the market

While the U.S. stock-market will be open for business on Monday, the bond market will be closed for Columbus Day and Indigenous Peoples Day holiday, giving investors somewhat of a pause before a big week of economic data that could shape the Fed’s next decision on interest rates.

“Ultimately, stocks and bonds will take their cues next week from the economic releases,” Fasciano told MarketWatch.

Key items on the calendar for the week will be September inflation reports, with the producer-price index on Wednesday and the consumer-price index due Thursday. In between, Fed minutes of its policy meeting in September also are due to be released Wednesday.

“That makes next week an important week for the future direction of both the bond and equity markets as the Fed will certainly be focused on those reports prior to their next meeting on Oct. 31-Nov. 1,” Fasciano said.

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October 6, 2023
S&P 500, Nasdaq notch best week in over a month as stocks jump after blowout jobs number

U.S. stock indexes rallied on Friday to finish the volatile trading week in the green as Wall Street debated on whether a blockbuster surge in jobs created last month could make the Federal Reserve raise interest rates again this year, though wages growth are moderating. The S&P 500
SPX,
+1.18%
advanced a modest 0.5% for the week with the benchmark index snapping its four-week losing streak, while the Dow Jones Industrial Average
DJIA,
+0.87%
was down 0.3% and the Nasdaq Composite
COMP,
+1.60%
jumped 1.6%, according to Dow Jones Market Data. On Friday, September jobs report showed the economy created 336,000 jobs last month, nearly twice the number expected, but the unemployment rate held steady at 3.8%, and hourly wages rose a mild 0.2% to mark their slowest annual growth rate in 18 months. A stronger-than-expected nonfarm payrolls report Friday triggered a renewed round of selling in the U.S. bond market, with the yield on the 10-year Treasury
TMUBMUSD10Y,
4.804%
up 5 basis points to 5.077%, after touching an intraday high of 5.21% on Friday. The yield on the 30-year Treasury
TMUBMUSD30Y,
4.973%
climbed 5 basis points to 4.941%, the highest since Sept. 20, 2007, according to Dow Jones Market Data.

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October 6, 2023
Why 5% bond yields could wreak havoc on the market

The yield on the 30-year Treasury bond briefly rose above 5% again on Friday, opening the door to the likelihood of a more sustainable rise above that mark and the risk that the benchmark 10-year yield follows — moves which could wreak havoc across financial markets.

One big reason is that investors are likely to demand greater compensation for taking risk as yields hover around some of the highest levels of the past 16 years, asset managers said. Corporate credit spreads could keep widening in a sign of worsening economic conditions and higher overall risk. And with returns on government debt becoming a more favorable option for investments, the stock market may be vulnerable to repeated drubbings.

Read: Treasury yields are climbing: ‘There’s never really been such an attractive opportunity for fixed-income investments’

Stock investors nonetheless shook off Friday’s stunning official jobs report for September, which saw the U.S. add almost twice as many jobs as forecasters had expected. All three major stock indexes
DJIA

SPX

COMP
finished higher even though yields climbed on everything from the 1-month T-bill
BX:TMUBMUSD01M
to the 30-year bond
BX:TMUBMUSD30Y.
The yield on the long bond finished at 4.941% — the highest level since Sept. 20, 2007 — after rising past 5% during the New York morning. The rate on the 10-year note
BX:TMUBMUSD10Y
ended at 4.783%, the second-highest level of this year.

Yields are returning to more normal-looking levels that prevailed before the 2007-2009 recession as the result of aggressive selloffs in government debt. More important than the absolute level of yields is the speed with which they have been heading to 5%. In the words of analyst Ajay Rajadhyaksha of Barclays earlier this week, there’s “no magic level” that will turn the current selloffs into a rally, and stocks have substantial room to reprice lower before bonds stabilize.

“I think the market isn’t breaking yet, but a 5% 10-year yield is coming,” said Robert Daly, who manages $4.5 billion in assets as director of fixed income at Glenmede Investment Management in Philadelphia. “We’re already here on 30s and not that far away on 10s. Investors are trying to figure what level breaks the market, and I don’t think you can put your finger on the pulse as to what that level is.”

Still, “a higher level of interest rates and yields is going to start having ramifications for broader markets at large,” leaving many investors hesitant to buy just about anything due to the volatility, Daly said via phone on Friday, after the release of September’s hot payrolls data.

Friday’s data, which showed the U.S. creating 336,000 new jobs last month or almost double what economists had expected, is opening the door to a possible interest rate hike by the Federal Reserve on Nov. 1. The strong labor market means the Fed’s higher-for-longer mantra in rates is still in play and “the market is in a tenuous position to navigate all these things because of all the uncertainty,” Daly said.

“Yields sustainably above 5% for a longer period of time will act as a weight on the market in terms of how you value risk compensation,” he said. “Investors are going to ask for more compensation to take risk and when you see liquidity evaporate more and more, that’s what’s going to turn the market over.”

Friday’s price action was the second time this week that data related to the robust U.S. labor market has triggered a bonds selloff. On Tuesday, a snapback in U.S. job openings for August sent the 10- and 30-year yields to their highest closing levels since August-September of 2007.

The next day, high-grade corporate-credit spreads widened for a seventh consecutive session. Daniel Krieter, a fixed-income strategist at BMO Capital Markets, wrote that “if rates continue to move higher or simply remain at these elevated levels for a significant period of time, it is going to have a pronounced effect on the creditworthiness of corporate borrowers, particularly in the high yield space.”

In a note on Friday, Krieter’s colleagues, rates strategists Ian Lyngen and Ben Jeffery, wrote that “it’s not difficult to envision 10s maintain a range between 4.75% and 5.00%.”

“The longer 10s hold this range, the more convinced the market will become that elevated yields are here to stay,” Lyngen and Jeffery said. “Admittedly, we’ve been surprised by the muted response in U.S. equities from the spike in yields and expect that’s due in part to the expectation for a swift reversal. In the event a correction fails to materialize, stocks will be overdue for a more meaningful reckoning.”

The risk of “something breaking” will remain top of mind and “there is no shortage of risks facing equities and credit as rates continue to climb,” they added. “It’s not only the outright level of yields, but the length of time that borrowing costs stay elevated will also hold implications for risk asset valuations.”

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October 6, 2023
S&P 500 scores best day in 3 weeks as bond yields ease back

U.S. stocks finished higher on Wednesday as yields on long government bonds retreated from 16-year highs, helping lift the S&P 500 to its best day in three weeks. The Dow Jones Industrial Index
SPX,
+0.81%
gained about 125 points, or 0.4%, ending near 33,128, according to preliminary FactSet data. The boost, however, failed to push the blue-chip index back into the green for the year, a day after its gains for 2023 were erased. The S&P 500 index
SPX,
+0.81%
rose 0.8%, marking its biggest daily climb since September 14, according to FactSet data. The Nasdaq Composite Index
COMP,
+1.35%
shot up 1.4%. U.S. bond yields have surged since late September when the Federal Reserve indicated that rates likely will stay higher for longer than initially anticipated as it works to keep inflation in check. The sharp bond-market repricing has made buyers reluctant to step in, sending yields higher and creating ripples in financial markets. The 10-year Treasury
TMUBMUSD10Y,
4.739%
fell 6.6 basis points Wednesday to 4.735%, while the 30-year Treasury yield
TMUBMUSD30Y,
4.868%
shed 6 basis points to 4.876%, after briefly topping 5% late Tuesday. Investors remain focused on political upheaval in Washington and the prospect of a November government shutdown. Friday also brings the monthly jobs report for September, which is expected to show a cooling labor market, but still a low 3.7% unemployment rate.

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October 4, 2023
How 10-year Treasurys could produce 20% returns, according to UBS

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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October 1, 2023
How Nvidia’s Jensen Huang may be driving Fed rate-hike expectations

“‘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

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

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

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