Published: Wed, February 07, 2018
Markets | By Noel Gibbs

Treasurys are surging as stocks get slammed

Treasurys are surging as stocks get slammed

The Dow Jones Industrial Average fell almost 1,600 points for its biggest intraday drop in history in points terms, or more than 6 percent, before ending down 1,175.21 points, or 4.6 percent, its biggest one day fall since August 2011. At one point, the Dow fell 6.3 per cent or 1,597 points, the biggest one-day points loss ever, as it breached both the 25,000 and 24,000 levels during trading.

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Interest rates that are set every day in the global bond markets are already leaping higher, in anticipation of central bank rate increases later this year.

However, on Monday, the Treasury bond yields saw buying as investors fled to safe-haven instruments leading to fall in USA 10 Year bond yield by 19bps to 2.70, as the United States stocks plunged.

Investors may get a hint of the direction of interest rates when trading resumes in Asia early Monday, and possibly more insight after the U.S. Treasury's $66 billion in auctions of 3-, 10- and 30-year bonds from Tuesday to Thursday.

The U.S. dollar rose against a basket of currencies as the U.S. bond market selloff levelled off. Traders were bored out of their minds for much of 2017, when Treasury yields fluctuated within the tightest range in a half-century. "While we don't think Friday's selloff is the beginning of a severe correction, the pressure on stocks will continue with high volatility making the mood in the marketplace uncomfortable". "It will be, but not today".

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That put it on pace for its largest loss in point terms: Its biggest point loss was a 777-point drop in September 2008 as the global economic crisis took hold.

The Toronto Stock Exchange'sS&P/TSX composite index fell 86.69 points, or 0.56 percent, to 15,519.34, shortly after the open.

Moreover, as we have just seen with the employment numbers this morning, wage inflation is picking up as average hourly earnings (year over year) increased 2.9%. Companies are healthy, and investors have rewarded them by pushing up their stock prices.

Fourth-quarter earnings growth is now forecast at 13.6 percent for the S&P 500, up from January's 12 percent forecast. "It's not setting some new kind of record other than its rapid ascent".

Australia's 10-year bond yield rose about five basis points to 2.88 percent. The Russell 2000 index of smaller-company stocks was down 39 points, or 2.5 percent, to 1,507.

Attractive yields on a safer investment have made stocks suddenly less attractive.

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Stocks were pummeled on Friday and Monday. For major utilities it has been far higher and now is about 3.7 percent.

Politics has played a part in stocks' steady march higher, too. The relative serenity over the previous year where markets seemed on a relentless, upward arc is an anomaly.

The ISM non-manufacturing index touched 59.9 in January, which was above the expected 56.5 (as per survey of Reuters economists), giving signs of growth in the economy's service sector. That's good news for workers but creates nervousness among equity investors concerned that the rise will fuel inflation. In economics, that's called inflation. Still, that's a long way from the double-digit interest rates of the early 1980s.

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In a unusual way, investors are nervous that the global economy is doing too well.

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