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By Nicholas
Jasinski| Tuesday, April 5 Yield
Backup. Hawkish
Fedspeak sent bond yields rising today, weighing on growth pockets of the
stock market and sending overall indexes lower. The tech-heavy Nasdaq
Composite lost 2.3%, the diversified S&P
500 fell 1.3%, and the more value-leaning Dow
Jones Industrial Average declined 0.8%. The normally relatively dovish Federal
Reserve Governor Lael Brainard emphasized
the central bank's focus on dampening inflation and tightening monetary
policy in a speech
today. Investors already know that interest rates are going up more this
year, but clearly there's some skittishness about the risk of even faster
increases than currently priced in. Brainard also addressed the Fed's $8
trillion balance sheet in her remarks today, saying that the central
bank will start to reduce the size of its balance sheet “at a rapid pace as
soon as [its] May meeting.” That would certainly be more aggressive than the
market is expecting right now, and affects longer-dated Treasuries and bond
yields more than short-term ones. Hence the strong negative reaction by
growth stocks today. Barron's Alexandra Scaggs explains: U.S. central bankers currently don’t plan to
sell bonds from the Fed’s $8 trillion portfolio—they have assured investors
they will allow bonds to mature without reinvesting the principal, much like
they did in 2017. But on Tuesday, Brainard said she expects its bondholdings
“to shrink considerably more rapidly than in the previous recovery.” Brainard discussed the recent increase in
long-dated Treasury yields as a sign of the Fed’s success in tightening
policy. Those yields “tend to be most relevant for household and business
decisionmaking,” she said, citing the increase in the cost of 30-year
mortgages. The Fed’s bondholdings are seen as a way for it to directly
influence long-dated Treasury yields: Its biggest holdings are in notes and
bonds maturing in 2 years or longer. Its outlook for its interest-rate
policy, on the other hand, affects short-dated yields most. So Brainard’s comments about the Fed’s
balance sheet hurt long-dated Treasury performance most, pushing those yields
sharply higher. The 10-year Treasury note yield
rose 0.15 percentage point today, to 2.55%. The yield on the
3-month Treasury bill, meanwhile, added less than 0.1 point,
to 0.66%. Long-duration, S&P 500 technology stocks
lost 2.1% today while consumer discretionary shares in the index fell 2.3%.
Defensive, bond-proxy sectors rose: utilities gained 0.6%, while consumer
staples and real estate both ticked up 0.1%. Read more from Alex here. |
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DJIA: -0.80% to 34,641.18 The Hot Stock: Zimmer
Biomet Holdings +2.6% Best Sector: Utilities +0.6% |
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