Finance

Treasury Yields Slip As Stocks Stutter In Choppy Trading — BOND REPORT

Treasury Yields Slip As Stocks Stutter In Choppy Trading — BOND REPORT

Ms Coupe said the volatility was coming about because investors were having difficulty deciding between stocks and bonds at the moment. You may have heard: Bond yields are surging.

President Donald Trump showed approval of the deal, tweeting that the agreement was "so important for our great military", adding that both major political parties "must support" the troops and therefore the bill. Here are some thoughts on why that can be bad for equities.

Another reason the stock market has risen so much over the past year has been the steady growth in corporate profits.

Only last month the Dow and benchmark S&P 500 index had their best monthly gains in two years, with stocks reaching record levels on January 26, supported by the benefit of a cut in USA corporate taxes in December, rising earnings, and healthy global economic growth.

Another way of thinking of this is to consider valuation multiples for each security. The average yield on the 10-year Treasury note over the past 30 years is 4.834 percent, still well above current levels. The fragile rebound lifted the market a bit, and the Dow and S&P 500 are now about 8% off their from all-time highs.

Again, the comparison, a version of something known as the Fed model, isn't unanimously embraced by professionals.

"Last year, you had $200bn-a-month going into the market from the European Central Bank (ECB) and Bank of Japan (BoJ), which suppressed bond yields, however this year it will average around $60bn". Bond yields are rising as the Federal Reserve trims its U.S. bond holdings.

A related concept is net present value. It also means Americans will pay more for mortgages and loans.

Many are bracing for more wild swings ahead as the Cboe Volatility index is holding at twice its level from a week ago.

"The bond market has definitely got the stock market's attention", said Ryan Detrick, senior market strategist at LPL Financial. "The links are always tenuous and squishy at best".




A pan-European index of stocks hit its lowest level in six months at one stage and closed the day 2.4 percent lower.

Furthermore, in Europe five-year German bund yields moved into positive territory for the first time since November 2015.

But there's a point where the "signal" leaves the abstract and becomes a drag on earnings. Rock-bottom financing costs have been a boon to earnings for a decade, a period in which the Federal Reserve has held rates near zero.

Some believe the 3 per cent yield is inevitable.

Monday's historic slump in United States stocks had something to do with this. The bond yield/equity yield or BEER ratio at 1.85 makes equities look overvalued. But they're going up now at a time when anxiety about the monetary policy is obviously on the rise. "I don't think he wants to establish right away that he wants a "Powell put" the way we had a "Greenspan put" and a 'Bernanke put"'.

Nor is the Fed alone in adjusting policy - the European Central Bank has reduced its monthly asset-purchase target and hasn't decided whether to extend buying after September.

The rise in bond yields, fuelled by a surging U.S. economy and corporate earnings, has spooked traders, anxious that the Fed will raise borrowing costs more than the three times initially expected this year. The Nasdaq composite edged up 10 points, or 0.2 percent, to 7,061. Rising yields in Germany has already caused the nation's benchmark equity index to drop for seven out of the past 10 weeks.

What's odd, however, is while rising rates are viewed as the enemy of stocks, history suggests that higher long-term bond yields don't have to be a threat to stocks, Don Luskin, chief investment officer at TrendMacro, noted in a report. All of that could result in a recession, which in the end is what most analysts say will kill the bull market.

"The pace really does matter", said Ron Temple, Head of US Equities and Co-Head of Multi Asset Investing at Lazard Asset Management in NY. The firm manages US$179 billion.

Wall Street is clearly trying to figure out whether this is the big one as the Fed gradually pushes official borrowing costs higher.


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