Published: Sun, February 11, 2018
Markets | By Noel Gibbs

Ignore the stock market rollercoaster, the sell-off in bonds is what matters

Ignore the stock market rollercoaster, the sell-off in bonds is what matters

Jim O'Neill, Former Commerce Secretary in the United Kingdom government, on Monday said the USA is growing and the central bank may need to tighten monetary policy faster than the market has perceived.

After rising sharply last week, U.S. Treasury yields fell from four-year highs on Monday as the selloff in equity markets sparked demand for low risk debt. The was at 2.81 percent from a high of 2.88 percent earlier in the day and the rising yields had started the stock market spiral lower. "Although markets are finally slowly starting to fully price in expectations of interest rate increases from the US Federal Reserve (they have been telegraphing as many as four for 2018), we don't think central bankers will risk moving too quickly and endangering the recovery they have painstakingly coached for the last decade".

Japan's Nikkei shed 2.9 percent, en route for a weekly loss of 8.6 percent - its biggest since February 2016. At the same time, the US deficit is growing and would be bumped up even more by the Senate budget deal, if it passes Congress.

The Dow has dropped as much as 680 points on Thursday, primarily because of concerns about the bond market and inflation.

"It signals that fiscal austerity out of D.C.is a thing of the past, and Republicans aren't almost as concerned with the overall trajectory of the deficit as they have been and the president is anxious about it", he said.

The bull market has feasted on extremely low bond rates for years, but those days may be ending.

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Strategists say the level of the yield is not so much the problem.

The market performance also reflects the strong US and global economies, which have boosted corporate profits.

"We're in a vicious cycle here". As a result, investors should consider selling global bonds in general. Rising yields are not good for stocks, and while Goggins is not ready to say that we're at a tipping point, if the market anticipates inflation, then the "discount rate on the price of stocks goes down", he says.

Interest rates are among many factors affecting the stock market, and optimism over economic growth and accelerating corporate earnings growth may outweigh concern about rising yields, especially now, when they're still low on a historical basis.

"It's as correlated as it's ever been to anything", said Hogan.

Oil prices fell to their lowest in seven weeks amid fears of rising global supplies after Iran announced plans to increase production and USA crude output hit record highs.

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The yield on the 10-year Treasury note was down 1.4 basis point to 2.833%, according to Tradeweb. The yield started the year at about 2.43 percent.

"What's the right multiple you're willing to pay?..." He said recently when Treasury yields were in the low 2 percent range, price-to-earnings multiples were able to get to about 18 percent.

5-year -10.3 bps @ 2.486%. Indeed, while US GDP is growing at as much as 5% a year, ten-year Treasuries are still yielding less than 3%, while United Kingdom ten-year yields are only around 1.4%, even though inflation is 3%.

"The answer to this will reset the level of risk premia, or risk tolerance for other asset prices", Caron said in a note. The comments were highly unusual for a Treasury secretary and came on top of new protectionist tariffs on solar panels and washing machines - and thus seen as part of a bigger policy agenda. This is not a bad thing, it's a normal and common readjustment in the market. But with the yield topping 2.88 percent Thursday and the S&P down 7 percent in the past week, stocks are already uncomfortable.

"So far this is a big story in the press, it is a big story for financial market participants, but I don't think it is a big story at all at this point for central bankers", Dudley said. That would make 3 percent the next stop. That could be another influence overnight.

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