On watch
The stock market is closed today for former President Jimmy Carter’s state funeral, but bond markets are open until 2 PM ET. Interesting things have been happening in the fixed-income world over the past few months as the Fed embarked on an easing cycle. All three interest rate cuts by the central bank since September have seen a subsequent INCREASE in longer-term Treasury yields (though those are more associated with the longer-term monetary and fiscal landscape, as well as economic conditions).
Snapshot: The 10-year Treasury yield (US10Y) rose to 4.73% on Wednesday, a whole percentage point higher than the level seen only a quarter ago, while the 20-year Treasury (US20Y) topped 5% for the first time since 2023. Concerns over the national debt and debt ceiling are at play, along with possible inflationary threats like higher tariffs, tax cuts, and mass deportations. Worries over fiscal discipline are also not restricted to the U.S., with borrowing costs in France now above those of Greece, while gilt yields in the U.K. have been pushed to their highest levels since 2008.
Investors are demanding larger premiums in response to the uncertainty, but there are also risks that this can turn into bond market activism or even so-called “bond vigilantism.” In the current environment, central banks have stepped back from their role as a dominant force in bond markets, which was conducted via quantitative easing following the financial crisis. That has given additional power to fund managers and other market players, leaving many wondering what it might mean for equity markets.
SA commentary: “While stocks may struggle during periods when long-term rates are rising, that struggle should be temporary so long as the increase is for good reason,” writes SA Investing Group Leader Lawrence Fuller. “As we have become accustomed in the past two years, the pessimists and fearmongers are warning of doom and gloom ahead, but markets are simply adjusting to the normalization of the yield curve, as the economic expansion continues.” Read more in Rates Are Rising For The Right Reason, So Don’t Panic
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