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Home / Business / Stock market investors freak over the bond market – but should they be?

Stock market investors freak over the bond market – but should they be?



Rising government bond yields and a shrinking gap between short-term and long-term Treasury rates have been a source of dismay on Wall Street, driving stock prices lower as investors resent what this momentum means for US economic growth Expansion.

Fears about a so-called flattening yield curve have been the focus of attention. Investors have identified the gap between the 2-year Treasury Notes

TMUBMUSD02Y, + 1.40%

and the 10-year benchmark

TMUBMUSD10Y, + 1.67%

which on Tuesday reached the narrowest point – 41 percentage points – in more than a decade.

The yield curve is often used as a measure of the general health state of the economy. In a normal environment, the yield curve rises more sharply as investors tend to demand higher returns on lending to the future, while a flattening curve is seen as a sign that investors are worried about the longer-term outlook. A reverse curve, in which shorter-dated yields exceed long-term debt, alarms a dynamic known as yield curve inversion because it has faithfully followed all recessions since 1960.

Read: Why? Stock investors should adopt a flattening yield curve – for the time being

The threat of such an inversion even caught the attention of Federal Reserve officials, and St. Louis Fed President James Bullard said: "If the Fed raises interest rates and the 10-year rate "does not cooperate" could invert the yield curve later this year or in 2019. Bullard added that the yield curve signal should be taken seriously. Bullard is currently not a voting member of the Political Open Market Committee.

Not everyone is freaking out about this possibility.

In a Friday Research Note, Raymond James analyst Andrew Adams argues that not every narrowing yield differential between the 2s and 10s leads to an inversion, and that some of the best stock market performance has come amid such fluttering yield trends: [19659010] True that all recessions since 1960 have been preceded by an inverted yield curve (generally defined these days as when the 2-year US Treasury spends more than the 10-year US Treasury), but the problem is too many people have this relationship last Time also extended to a fluttering yield curve. Yes, the yield curve has smoothed – the spread between the 10-year and 2-year rates has narrowed from ~ 130 basis points in early 2017 to now 48 basis points – but the reversal of the reversal point is far from imminent. Such a flat yield curve does not always result in an inverse yield curve and even if this is the case, the delay time can be years before it occurs. In addition, some of the best stock market returns in history are seen after the yield curve flattened out today, including after 1984, 1988, 1994, and 2005 (see chart 2 on page 2, arrows in the lower S & P 500 panel) when the yield curve is 10-2 distribution first became as narrow as it is currently). In fact, the 10-2 spread for the entire period 1994-2000, the largest IPO in history, was relatively flat. So are we worried about the yield curve, which signals that a possible recession is imminent? No, not at this stage.

Here is a graph provided by analyst Raymond James via Stockcharts.com:




The Fear of Rising Bond Yields

The steady rise in 10-year Treasury yield The highest level since Friday's uncertainty the markets and let the US dollar and the stocks revolve, even as the yield curve steepened a bit.

Friday's selling pressure on US stock markets tightened late in the day when yields on 10/10 – the annual Treasury note peaked at more than four years

The Dow Jones Industrial Average

DJIA, -0.82%

fell 201.95 points or 0.8% to 24,462.94, but ended the week up 0.4%. The S & P 500

SPX, -0.85%

dropped 22.99 points or 0.9% to 2,670.14, with 10 of the 11 major indices ending in losses. The hardest hit were consumer goods and technology stocks, which lost 1.7% and 1.5%, respectively. Nevertheless, the leading index showed an increase of 0.4% during the week. The Nasdaq Composite Index

COMP, -1.27%

fell 91.93 points to 7,146.13, a decrease of 1.3%. During the week, the tech-heavy index rose 0.5%.

In the meantime, the dollar

DXY, + 0.40%

strengthened as the 10-year-old flirted with the psychologically important 3% mark, boosting the demand of buyers who want to invest in the buck, with the promise Stocks

Yields have been a focal point for markets since February, when the 10-year-old made another pause towards 3% before retreating. The higher borrowing costs this entails for companies and the competition that bonds offer against equities are part of the reason why investors have stopped as treasury interest rates rise.

Higher rates can be accepted by the market if they suggest a real improvement in the economy, but can trigger fears on growth issues.

Read: Dollar Recovery Will Not Remain Here: Analyst

Record Week on Corporate Profits

Can Corporate Profits Reassure Investors' Nerves Over Yield Curves and Rising Interest Rates?

That's the big question. "I think investors want to see more, we'll have a broader margin in all sectors next week, and we need to focus on the technology sector," said Quincy Krosby, chief market strategist at Prudential Financial, CNBC in an interview on Friday.

See also: Can Facebook, Apple and Google continue to drive technology growth?

Lindsey Bell, investment strategist at CFRA, told MarketWatch that nearly 80% of the companies that have reported so far outperformed earnings estimates, while about four out of six companies outperformed on sales. "Much better than the historical standards of 66% and 55% respectively," she wrote.

So far, earnings growth is at 17.5% yoy, better than the initially expected 16.3% (19659005) However, this has not spurred the Wall Street purchases:

"Despite the positive results, the Equities do not respond positively – companies that are both top performers and profit-maximizers increased their shares by only 0.5% on average on the day of the report – companies that missed EPS expectations and exceeded sales expectations, On the day of their announcement, they had to accept an average of 4.4% decline.

Looking ahead to next week, 37% of the Index will show results, making it the busiest week of the season, Bell said. Companies (including 12 Dow 30 components) report results for the first quarter according to FactSet data.

Alphabetical revenue: Google offers a look at its Uber investment

Early Businesses Report Google Parents Alphabet Inc .

GOOG, -1.36%

GOOGL, -1.11%

on Monday after the closing bell, Dow Components United Technologies Corp .

UTX, -0.62%

Coca-Cola Co .

KO, -1.29%

Caterpillar Inc. .

CAT, -1.08%

3M Co .

MMM, -0.50%

Verizon Communications Inc. .

VZ, -1.09%

Travelers Cos. Inc .

TRV, + 0.18%

on Tuesday before the start of regular trading.

Economic data

Monday

  • Chicago Fed nationality activity index at 8:30 am Eastern Time
  • Markit Flash PMI for Industry and Services at 9:45 am
  • Existing home sales at 10 am, with 5.52 million forecasts for March

Tuesday

Case-Shiller house price index for February due at 9 pm

New home sales at 10 o'clock, with 625,000 new properties expected

Consumer confidence due for April at 10 o'clock, with forecast 126

Thursday (all notifications at 8:30, unless otherwise stated)

  • Commodity orders for March
  • Pre-selling of goods [19659046] Core capital investment orders [19659044] Weekly Unemployment Claims
  • Residential Quarter in the First Quarter 10:00 am
Friday
  • Q1 gross domestic product due at 8:30 am, 2% expected [19659046] Employees Cost Index for the First Quarter Planned at 8:30
  • Consumer-senti Index for the April Due at 10:00

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