March 24, 2018

Treasurys are surging as stocks get slammed

09 February 2018, 11:42 | Christie Tate

Treasury bond yield spike spooks stock market bulls

Yields rise as stocks pare losses, on hawkish BoE

Here we go again.

While Wall Street has been calling for a correction for some time, given the market's euphoric rise, the fall has been more violent and quicker than anticipated.

The S&P 500 Index fell 1.4% as of 11:33 a.m. That catapulted 10-year Treasury yields - a key global interest rates indicator - to fresh four-year highs.

Most Asian and European stock markets slumped on Monday on intensifying worries over the prospect of rising interest rates in the United States, dealers said.

The volatility in the stock market over recent days did not change the outlook for the US economy or central bank policy, two senior Federal Reserve officials said on Wednesday. Higher interest rates indicated that inflation will increase, which raised the prospect that the U.S. economy could overheat.

The Dow Jones industrial average closed down 4.2 per cent, to close at 23,860, on Friday morning New Zealand time, as investors continued to react to fears that interest rates may be on the rise. All of the Nasdaq's gains for 2018 were also wiped out.

The Dow finished with a decline of 1,033 points, the second-worst point drop in history, eclipsed only by Monday's 1,175-point nosedive.

Trading has been choppy for days, and the market has swung in wide ranges - up and down almost 2,300 points over the past week. The Dow surged 567 points on Tuesday, but a 381-point rally vanished on Wednesday after bond yields crept higher.

"In the case of risk aversion, we might see support for core government bonds", said Mathias van der Jeugt, head of market research at KBC. But it certainly prompts central banks to take monetary action, which reduces liquidity in the system.

And though the tumble in the S&P 500 may be nothing but a breather, concern is mounting that the Treasury market's travails are becoming an inescapable portent for stocks.

"We had an epic run".

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"Fundamentals are still positive, there is strong economic growth and strong earnings growth - those will help stocks move higher over time", said Kate Warne, investment strategist at Edward Jones in St. Louis.

So far, equities appear to have found some stability, with the S&P 500 still only down about 1 percent this year. That only happened eight times all of previous year.

"We've hit this incredible dose of volatility like nothing we've seen since Brexit", Detrick said.

Equity bulls may argue that despite the spike in bond yields, they are still considered much lower than where they stood back in 2007 when 10-year treasury yields peaked at 5.33%. Last week, the gap between two- and 10-year yields steepened by the most in four months.

Investors are still weighing whether the sharp swings this week are the start of a deeper correction or just a temporary bump in the nine-year bull market, spurred by concerns over rising interest rates and bond yields. To fight inflation, central banks go hawkish on interest rates.

The Dow plunged more than 1,100 points on Monday, in its biggest daily point decline ever, as a stronger-than-expected U.S. jobs report stoked fears that interest rates would be hiked quicker than previously anticipated.

An improving outlook internationally is adding to pressure on global fixed income markets. S. congressional leaders Wednesday reached a two-year budget deal to raise government spending by nearly $300 billion. The recent tax bill has forced the Treasury to borrow more money, which will put more bonds into play.

The move has kept equity investors nervous about higher rates and inflation.

Bank of America analysts warned that the Senate agreement will contribute to "higher rates" and raise "risks for tighter overall financial conditions". German 30-year bond yields rose to two-year highs at 1.429 percent.

"There are no mechanical linkages between the Treasury market and the stock market", said Brian Jacobsen, multi-asset strategist at Wells Fargo Asset Management. For now, our core view is it will be an orderly transition, as equity markets remain underpinned by solid global growth and strong corporate earnings. The job market remains healthy, as evidenced by a report Thursday that applications for unemployment benefits are at a 45-year low.

"I think there's going to be an interplay between equities and rates probably for the next several months, until we get greater clarity on how the overall growth outlook is going to be and if the Fed is thinking about shifting the reaction function", said Mark Cabana, head of USA short rates at Bank of America Merrill Lynch.

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