Rising U.S. Treasury yields have pushed the 10-year Treasury yield to nearly 5%, the highest level in 16 years, creating a challenging environment for stock market investors.
The 10-year U.S. Treasury BX:TMUBMUSD10Y yield ended Thursday nearing 5%, its highest level since 2007, but fell again on Friday. The 30-year US Treasury bond BX:TMUBMUSD30Y interest rate also fell after hitting its highest since 2007 at Thursday’s close.
Bond market volatility has also increased compared to historical levels. The ICE BofA MOVE index, known as the bond market’s “fear gauge,” hit 142 in early October, its highest level since May. It was about 135.5 on Friday, according to FactSet data.
“I think we are in a new era where it is not safe to have bonds. Bonds are not without risk. In 2022, the 30-year Treasury will lose more money than the Nasdaq. ” said Nancy Davis, portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge ETF IVOL.
Rising U.S. Treasury yields have been the biggest contributor to the recent stock market downturn, said Jay Hatfield, CEO of Infrastructure Capital Management.
The US stock market fell this week, with the Dow Jones Industrial Average DJIA down 1.6% and the S&P 500 SPX down 2.4%. The Nasdaq Composite Index has fallen 3.2% over the past week, according to Dow Jones market data.
Hatfield said stocks are sensitive to interest rates because they are inherently very long-term securities. When interest rates rise, future returns on stocks are discounted at a higher rate.
Rising government bond yields are also making riskier investments less attractive. Bond yields increasingly exceed the earnings yields of companies in the S&P 500 index. “It just doesn’t make sense to hold stocks at high prices when the 10-year Treasury yield is close to 5%,” said Jose Torres, senior economist at Interactive Brokers.
Hatfield said their model shows that for every 40 basis points increase in the 10-year Treasury yield, the S&P 500 index multiple theoretically decreases by 1 point.
Over the past three months, the yield on the 10-year Treasury note has increased by 108 basis points. This means the S&P 500’s multiple drops by almost 3 points., Hatfield pointed out: The S&P 500’s price-to-earnings ratio was 19.34 on Thursday, according to Dow Jones market data.
Sentiment also wasn’t helped by Fed Chairman Jerome Powell, who said on Thursday that bond market volatility was something the Fed should “let play out,” although he said rising Treasury yields were tightening financial conditions. , said the rate hikes would be done “at the last minute” and could replace further Fed rate hikes.
read: Bond traders see a ‘green light’ to push yields higher after Chairman Powell’s remarks – Fed watchers
From a technical perspective, Torres said he expects the 10-year Treasury yield to test 5.29% in the coming months. Above that, “we’re pretty much in uncharted territory in terms of how far we can get.” Yields could rise as high as 6% this cycle before a recession pushes yields lower. Torres said.
Hatfield is more optimistic, predicting that the 10-year Treasury yield will peak at around 5%. Hatfield said next week: “If interest rates stabilize at all, the stock market should be driven by earnings rather than interest rates, because we’re getting our money from the tech giants and it’s hard for people to ignore that. Because I can’t.”
Microsoft Corporation
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,
Google’s parent company Alphabet Inc.
Google
and Visa Co., Ltd.
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is scheduled to announce its third quarter results next Tuesday. Facebook’s parent company Meta Platforms Inc.
Meta
and amazon
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They are expected to report next Wednesday and Thursday respectively.
Still, Hatfield said he doesn’t think there will be much movement in the current market environment. “While we are bullish on interest rates and the stock market, the situation is dangerous. There is still war in the Middle East. And positive inflation data will not be released until November,” he added.
Preferred stocks that pay fixed dividends to shareholders can be a good choice, and investors may choose to add tech stocks in time for next week’s earnings report.
That said, Hatfield said his biggest advice to investors is to remain cautious. “This is Adult Swim. This is a market you want the world’s best traders to trade.”
Torres said the high level of bond yields makes it ideal for active rather than passive management.
“With interest rates this high, stock market performance will be further constrained over the next five to 10 years. This is truly a stock-picking environment, where we are looking for the right companies and the right sectors for growth at the right time. I think it’s a choice,” Torres said.
The next major data points will be the October Manufacturing Purchasing Managers Index, which will be released on Tuesday, and the September Personal Consumption Expenditures (PCE) Price Index, which will be released next Friday.
Investors are anticipating September new home sales figures to be released on Wednesday, followed by third-quarter U.S. GDP, weekly new jobless claims and September durable goods orders data on Thursday.