Treasury bond yield spike spooks stock market bulls

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Treasury bond yield spike spooks stock market bulls

Shares have headed south again on Wall Street.

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 US corporate taxes in December, rising earnings, and healthy global economic growth.

"With US ten-year treasuries at four-year highs, does this herald the start of a bond bear market?"

"I'd like to see buying come in late in the day instead of having a selloff like we had yesterday".

The retreat in equities had been long awaited by investors as the market climbed steadily to record high after record high with few bumps.

Treasury yields were recently rising amid Fed concerns of a pickup in inflation and the jobs report showing wages were rising faster than expected. Rising yields are not good for stocks, and while Goggins is not ready to say that we're at a tipping point, if the market anticipates inflation, then the "discount rate on the price of stocks goes down", he says. Given that the market is still trading near all-time high level - despite the recent correction - on mere earnings revival hopes, one may, for example, seek that "risk premium" at 6 per cent. And the more bond yields rise, the more will be this opportunity cost.

Stocks closed lower Wednesday, but not before swinging wildly to sharply higher and lower levels, as interest rates rose.

Kotak Institutional Equities in a recent note suggested that the market was overlooking the rising yield on some "misguided view" about earnings and macro-economic factors being less relevant to the equity market against ample global liquidity.

"Higher rates are going to slow the economy, we just don't know when and we don't know which rates to watch, and I think that's the debate that's now playing out in the market", he said.

But why are rising bond yields hurting equities? There are risks from moving wholesale from stocks to bonds.

"But it doesn't do much for predicting short-term moves". "Be careful what you wish for". U.S. bond yields rose sharply on Monday after official data released on Friday showed USA wages were increasing at the fastest pace since 2009. Steve Bartolini, who's a member of T. Rowe Price's fixed-income team, doesn't think 10-year Treasury bond yields will rise much further from here. "As it approaches 3 per cent, concerns about inflation and competition for stocks by fixed income securities are increasing".

Boockvar said the US bond market is responding to rising German bund yields, which are expected to keep rising.

Treasury issuance was already set to rise this year before the passage of a sweeping tax overhaul in December that's slated to significantly add to the deficit.

"It's the beginning of at least a verbal currency war", Nouriel Roubini, professor of economics at New York University, told Bloomberg Television.

Treasury Secretary Steve Mnuchin sent the strongest signal yet last week in comments welcoming the dollar's decline as beneficial to USA exports.

"Investors are nervous about three things", said Larry Hatheway, an economist and Zurich-based asset manager. But they're going up now at a time when anxiety about the monetary policy is obviously on the rise. Accelerating inflation may crimp corporate profits.

A strong dollar policy has allowed the Fed to keep interest rates low for a prolonged period, argues Rebecca Patterson of Bessemer Trust. The prospect of more aggressive Federal Reserve rate hikes in 2018 has also boosted the US Dollar Index above the 88 low it hit on Steve Mnuchin's Davos comment, the reason crude oil, gold and silver got slammed on Friday. "However, the selling pressure unmasked a variety of issues, including investor complacency and the difficulty of unwinding crowded and complex trades involving leverage, or borrowed money".

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