Rising yields: It's a trust issue

Reuters

Rising yields: It's a trust issue

Oct 31, 2024 at 4:14 pm GMT

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Major U.S. indexes red; S&P 500 off 1.4% Nasdaq down 2.3%

Tech weakest S&P sector; Utilities lead gainers

Euro STOXX 600 index off ~1.3%

Dollar flat; crude up ~1%; gold off >1.5%; bitcoin off ~3%

U.S. 10-Year Treasury yield rises to ~4.30%

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RISING YIELDS: IT'S A TRUST ISSUE

September 18 was a pivotal day for the bond market. Not only was it the day of the Federal Reserve's first interest rate cut since March 2020, but it was also just one day after the low point of the year for the U.S. 10-year Treasury yield US10YT=RR at 3.599%:

Since then, the yield has spiked around 70 bps, begging the question: What is the bond market saying?

"The bulk of the most recent move was almost entirely attributable to a higher real yield – in many respects, this can be considered the 'distrust' premium Treasury lenders require to extend credit to the federal government," writes Jack Ablin chief investment officer and founding partner at Cresset, in a market update note.

The bond sell-off has sent ripples through other markets from currencies to crypto. Yet Ablin notes that bond spreads, the yield premium lenders require to extend credit to non-Treasury borrowers, are tight for public corporate bonds and private direct lending, suggesting to him that "credit conditions are expected to remain healthy."

According to Ablin, bond investors are also evaluating other risks and uncertainties. Indeed, with the election taking center stage next week, investors are concerned that both candidates’ policies are poised to increase the federal deficit.

Ablin believes Treasury investors are also worrying about the U.S. government debt load, which he says recently eclipsed annual GDP – and, at 120% of GDP, is nearly double 2008 levels and growing.

As Ablin sees it, prospective presidential policies may stimulate growth and inflation which would create an environment which would be favorable for risk taking, "since the propensity to repay debts increases with cheaper dollars."

Ablin says that bond volatility is expected to spike in the days following the election, and that conditions keeping the Fed from lowering rates stand as the biggest risk to investment markets in the near term. Indeed, monetary policy makers could be sidelined if they sense impending fiscal stimulus would drive spending and prices higher.

However, he emphasizes that "History suggests presidential elections influence investment markets in the near term, but over the subsequent year longer-term trends reassert themselves."

(Terence Gabriel)

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FOR THURSDAY'S EARLIER LIVE MARKETS POSTS:

HALLOWEEN CANDY: PCE, JOBLESS CLAIMS, EMPLOYMENT COSTS, ETC - CLICK HERE

U.S. STOCKS UNDER PRESSURE IN EARLY TRADE AS YIELDS RISE - CLICK HERE

U.S. STOCK FUTURES REMAIN RED WITH EARNINGS, BIG DATA DUMP - CLICK HERE

HIGHER GROWTH, HIGHER INFLATION: ECONOMIST VERDICT ON UK BUDGET - CLICK HERE

"FRANC-LY, MY DEAR..." TARIFFS WON'T MATTER - CLICK HERE

STOXX AT 7-WEEK LOWS - CLICK HERE

EUROPE BEFORE THE BELL: TECH DRAG AND BANK EARNINGS - CLICK HERE

CLOUDS GATHER OVER 'MAG 7' EARNINGS - CLICK HERE

US10YT10312024 https://tmsnrt.rs/3YItBCL