Old-Fashioned Risk-Off

By Brian Hershberg | Thursday, July 8

Midsummer Malaise. Stock investors awoke Thursday to a host of concerns—from rich valuations to economic uncertainty to the threat posed by Covid variants—and sought haven in a familar shelter: U.S. Treasuries. 

Yields on Treasuries, which move opposite prices, tumbled as investors bailed out of stocks and put a premium on safety. The benchmark 10-year Treasury note yielded below 1.3% for the first time since the start of the year, ending at 1.30%. It's now well off a late-March peak of 1.75%.

While stocks retreated from record highs hit just a day earlier, Barron's reporter Alexandra Scaggs points out that Treasury yields have been heading lower for a while now. Stock investors would be wise to examine the reasons why: 

TS Lombard strategist Dario Perkins attributes the longer-term slide in yields to concerns over “peak everything,” a phrase meant to reflect a slowdown in economic momentum compared to early this year, when activity and inflation rebounded sharply.

Further, central bankers and policy makers worldwide have started to weigh how to reduce the monetary and fiscal stimulus, which was the largest since World War II, Perkins observes in his July 8 note.

“Global policy tightening [is] taking over from inflation as the main ‘known unknown’ facing financial markets in the second half of 2021 and beyond,” he wrote. While he believes that Treasury yields are likely to rise from here—few on Wall Street expect the 10-year yield to remain below 1.3%—he added that “investors should expect greater volatility for global markets in the post-QE world.”

Whether Thursday's selloff is a start of that volatility or just a blip in the broader bull market remains to be seen. But one sign that it could be a more enduring run of volatility comes from the tech-heavy Nasdaq Composite, writes Barron's Ben Levisohn, who notes that a correlation between falling bond yields and rising tech stocks has broken down. 

The result was a classic risk-off day where the Nasdaq lost 0.7%, the Dow Jones Industrial Average shed 0.75%, and the S&P 500 declined 0.9% (including declines in all 11 sectors).

Or as Oanda's Sophie Griffiths says: “While stocks have been on a tear, hitting all-time highs last month, the mood in the markets is starting to sour."

DJIA: -0.75% to 34,421.93
S&P 500: -0.86% to 4,320.82
Nasdaq: -0.72% to 14,559.78

The Hot Stock: Biogen +3.9%
The Biggest Loser: Kansas City Southern -7.9%

Best Sector: Real Estate -0.1%
Worst Sector: Financials -2.0%