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By Nicholas
Jasinski| Monday, April 18 Indecisive. U.S. stocks wavered
between positive and negative territory today, as investors sorted through
the latest batch of earnings reports and bond yields hit fresh highs. Major stock indexes ended the day just below
break even. The S&P 500 slipped just 0.02%,
while the Dow Jones Industrial Average
and the Nasdaq Composite each lost
0.1%. Notable earnings releases today included a solid
report by Bank of America and a dismal
one from Charles Schwab. Synchrony
Financial and Bank
of New York Mellon also reported. Tomorrow's highlights
will be Netflix, IBM, Johnson
& Johnson, and Lockheed Martin. The 10-year U.S. Treasury note
yield rose to 2.86% today, certainly low by historical standards but still
the highest it has been since December 2018. The yield is up nine of the past
11 trading days, as a rout in long-term bonds has only gained steam. (Bond
yields move inversely to prices.) That has negative implications for
valuations of growth-oriented stocks that are expected to earn the bulk of their
profits far in the future—a well-worn topic by now. But the silver lining is
that the recent run-up in long-term bond yields has far outpaced the move in
shorter-term bonds, uninverting the Treasury yield curve. Historically, a yield curve that's downward
sloping has been a strong predictor of a recession on the horizon. In normal
times, investors demand a higher yield to lend for longer periods—unless
they're more worried about the immediate future. Jacob
Sonenshine explains: Back in late March,
short-term yields had risen so fast that they were higher than long-term
yields. That was because markets expected the Federal Reserve
to lift its short-term benchmark lending rate so high—to tamp down
inflation—that economic demand would falter for the long term. If demand
significantly declined, so would inflation, which means long-term bond yields
would drop as well. The yield curve has come a long way since then. The 10-year Treasury
yield is at 2.86%, 0.4 percentage point higher than the two-year yield’s
2.46%. That’s a big improvement from March 29, when the 10-year yield of
2.34% was below the two-year yield of 2.38%. The higher long-term yields have come as the
Fed has elaborated on its plans to reduce its balance sheet holdings. That
would add selling pressure for longer-term bonds, reducing prices and
increasing yields. At the same time, the two-year Treasury yield has risen to
generally where the Fed has guided it will increase short-term rates
to—capping gains there for the time being. The result has been a steeper
yield curve. But it's not an all-clear for the economy,
Jacob writes. For starters, a 0.4 percentage point gap between the
10-year and 2-year yields is tiny, down from 1.5 percentage points a year
ago. And the curve will need to stay uninverted for several trading days for
it to truly indicate the market's greater confidence in the economy. For bond investors, there's still not a
whole lot to love out there. Andrew Bary recently surveyed
the landscape—from munis, to corporate bonds, to preferreds. Read his report
on opportunities in the bond market here. |
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