What's the Bond Market Saying?

 

What's the Bond Market Saying? The U.S. Treasury market also got some attention today, with the yield on the 10-year note rising to its highest level since June in the morning. After President Trump’s tweet hit the market, that reversed course and the yield fell 2 basis points, or hundredths of a percentage point, to 0.742%. As a reminder, the 10-year yielded close to 1.9% in January, before falling to a low around 0.5% during March’s market turmoil. Those are small absolute moves, but represent major volatility for what is traditionally one of the most stable and safest assets available. Low interest rates have helped boost stocks in 2020, as they made equities relatively more attractive versus bonds and made companies’ future earnings worth more in the present, boosting valuations. The Federal Reserve won't be raising interest rates any time soon, and continues to purchase vast quantities of bonds on the open market. Nonetheless, some investors have worried in recent weeks that rising bond yields could be a headwind to the stock market. Here's BMO Capital Markets’ Ian Lyngen today: The underlying question is how much can rates [rise] before stock prices begin to wobble and thereby effectively cap Treasury yields in the medium term. The traditional correlation between higher equities and yields appears to be functioning again; at least in the very near-term—even if assuming it’s a semi-permanent fixture may be folly. But, on the other hand, rising Treasury yields could also represent investors’ collective view that the economy is improving. That is bullish for stocks, implying flows from bonds to equities and potentially better earnings growth in the future. The debate will continue, with today's market action presenting conflicting views of the recovery. The more economically sensitive Russell 2000 index closed down just 0.3% today, handily beating large-cap indexes, while the price of oil jumped more than 3%—that’s a bet on a recovery. But defensive utilities were the only sector in the S&P 500 to rise—suggesting the opposite.