Rising Bond Yields Keep World Stocks Unstable

Screen Shot 2018 02 05

He said assets like stocks that are valued off of bonds are "vulnerable too".

Koulajian pointed to the fixed income market as the main catalyst right now for near-term moves in the stock market. But a stock market accustomed to a steady climb for more than a year and half as given way to two weeks of shaky selling. And the more bond yields rise, the more will be this opportunity cost. "Is the bond market telling us something we don't know?" 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.

Sam Stovall, CFRA chief equity strategist, said he now sees a 14 percent total decline for the S&P 500 to about 2,534, near its 200-day moving average. The BEER ratio (bond yield/equity yield) now stands at 1.85, suggesting that equities are overvalued.

Yields saw their climb erased on Friday as US stocks swung between gains and losses, reflecting the tug of war between a classic flight to quality response and growing fears bonds are in a bear market.

Only last month the Dow and benchmark S&P 500 index had their best monthly gains in two years, with stocks reaching record levels on January 26, supported by the benefit of a cut in USA corporate taxes in December, rising earnings, and healthy global economic growth.

What is making bond yields rise?

Investors in utility and real estate stocks - and indeed all dividend-paying equity sectors - should, however, recognize the threat that further increases in bond yields would present to future portfolio returns. A higher fiscal deficit leads to a spike in government borrowings, especially when government's revenue generation has been sluggish.

Also worrying markets was a government budget proposal U.S. lawmakers in Congress have announced, which raises spending caps and could fan inflation. Companies are healthy, and investors have rewarded them by pushing up their stock prices.

That was the reason why bonds yields had soared in many European economies such as Italy and Greece during the debt crisis a few years ago. This is not a bad thing, it's a normal and common readjustment in the market.

Fed Funds futures implied just two rate hikes in 2018 after Dr Yellen's FOMC hiked rates in December 2017, with only 30 per cent odds of three rate hikes.

"When longer-term interest rates rise, that tends to stem inflation and economic growth, and that feeds back into corporate profits". Central bankers have nurtured the world economy to the general ward from the ICU. It is too early to speculate if the U.S. dollar will be sustained by a "safe haven" panic flows from Europe and Japan, as happened just after the failure of Lehman Brothers in 2008.

Steelers hiring former Penn State assistant Tom Bradley
He told PennLive this past season that he does not want to give up coaching Pittsburgh's current core of defensive line talent. He's previously been the defensive line coach for the Chicago Bears, Minnesota Vikings, New York Jets and Buffalo Bills .

"If 2.88 scared people why would they be comfortable with 2.84/2.85", said Schumacher.

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

The rise in bond yields, fuelled by a surging USA economy and corporate earnings, has spooked traders anxious that the Fed will raise borrowing costs more than the three times initially expected this year.

Overseas market jitters mostly eased after plunging earlier this week. "Is there more inflation down the road than we're expecting?"

Of late Brent crude prices have been rising and brokerages like Goldman Sachs project the prices to top $80 a barrel in six months.

So investors should be anxious about higher interest rates, just not yet.

There are speculations that the US Fed may turn hawkish, if inflation hits the target of 2 per cent growth. You may have heard: Bond yields are surging.

"You are beginning to see the edge taken off the United States economy as capacity has disappeared", Warner said.

Cabana said his call for a 2.90 percent 10-year this year is clearly at risk.

Similarly, between May 2003 and June 2006, a 177 bps surge in the UST 10-year yield failed to deter U.S. equities from notching up 32 per cent gain.

"Equity nervousness seems to be about repricing for higher yields and tighter Fed policy".

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