Published: Mon, February 12, 2018
Economy | By

Treasurys are surging as stocks get slammed

Treasurys are surging as stocks get slammed

This will resurrect the ghosts of the bond market vigilantes of the Clinton-era in the 1990s.

If inflation picks up "more assuredly" he said the Fed could easily raise rates another three or four times in 2018.

Koulajian pointed to the fixed income market as the main catalyst right now for near-term moves in the stock market.

The market started the day just modestly lower, but selling picked up as the 10-year Treasury yield hit a four-year high of 2.88%, renewing concerns about inflation and higher interest rates.

But why are rising bond yields hurting equities? If the yields go up, you have to sell stocks. The Nasdaq slumped nearly 1%, while the S&P 500 fell modestly. So US bonds yields are rising, giving equities a run for money. That compares with 22.6 times profits for the S&P 500.

Ms Coupe said the volatility was coming about because investors were having difficulty deciding between stocks and bonds at the moment. "This market is not going to go up forever, and rates aren't going to stay stable forever".

"The simplest way to look at it is, everything is relative".

A related concept is net present value.

"The cause of this correction is the ostensibly withdrawal of liquidity by central bankers, and consequently rising interest rates". In China, markets were overheated after a steep rise since the start of this year, said David Cui, China equity strategist at Bank of America Merrill Lynch.

Many investors have anxious that after years of market volatility being suppressed by ultra-low interest rates around the world, the good times were bound to come to a hard landing.


"This is the beginning of more meaningful setback in a market that was, at least from the nonfinancial sectors, very overvalued and there was a lot of euphoria", said Jonathan Garner, a global emerging market strategist at Morgan Stanley.

Benchmark 10-year notes last rose 5/32 in price to yield 2.8312 percent.

But there's a point where the "signal" leaves the abstract and becomes a drag on earnings. To drum up demand for that higher supply, rates may have to go up. 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. (In a six-month span, the S&P 500 fell 45%.) Gross himself says the bond bear market will be a "mild" one.

Jim O'Neill, Former Commerce Secretary in the United Kingdom government, on Monday said the U.S. is growing and the central bank may need to tighten monetary policy faster than the market has perceived. The S&P 500 and Nasdaq were also firmly in the red. Stocks over the long term create more wealth than fixed-income bonds, but they are more volatile and have more risk. "There is an emerging inflation story in the USA - and rising United States inflation makes monetary policy less predictable".

"I think 2.90 could be broken at any point in the next 36 hours", said Andrew Brenner of National Alliance.

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. Traders are rushing into the safety of bonds amid the selling, pushing yields in the belly of the Treasury curve down more than 10 basis points.

However, rising bonds does not always lead to poor equity performance.

Friday's employment data was strong and, in particular, wages growth is starting to accelerate in the USA, which means that the Fed may have to raise interest rates more and as a result bond yields may rise even more significantly.

The bull market has feasted on extremely low bond rates. As bond yields rise the spread between the two narrows, prompting asset allocation changes between equities and fixed income. The firm manages US$179 billion.

The move has kept equity investors nervous about higher rates and inflation. "There's both a market valuation explanation and a fundamental economics mechanism".

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