Finance
Markets are concerned that government bond yields could bounce back to levels that caused chaos last October
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Ten-year U.S. Treasury yields are hovering below levels that caused a massive crash last fall.
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Still, persistent inflation and weak government bond auctions could push yields above 5%.
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Once this threshold is crossed, investors could experience a sharp stock correction.
Government bonds may not be the highest octane trade, but if yields don’t rise that far above current levels, things could end up being anything but boring.
While this year’s stock momentum has distracted Wall Street, 10-year yields have risen a whopping 83 basis points since 2023.
That rose to 4.7% in April, not far from the threshold level that devastated the markets last fall: 5%. When this 16-year high was breached in October, it set an all-time high worst market crashes. While Treasuries fell on Friday after a lackluster jobs report, markets are still cautiously eyeing further upside amid stubborn inflation and broad economic strength.
Can a repeat of a 5% return happen? For analysts, it all depends on fiscal policy and inflation.
Where returns go
“Bond King” Bill Gross is among those advocating caution, telling investors that high federal borrowing will push interest rates within 5%. the next 12 months.
Yields move inversely to bond prices, meaning weak demand pushes rates up. That’s why Treasury auctions have become attention grabbers for the markets, as investors look to see if there are enough willing buyers.
“Sloppy” auctions are to blame for last fall’s bond crisis, market veteran Ed Yardeni told Business Insider. Many buyers have been turned away by The exploding US debt burdenand with little effort to control it, more disappointing auctions could follow, he said.
Both the Treasury Department and the Federal Reserve made liquidity adjustments this week to ease pressure on buyers, but it remains to be seen whether these efforts are enough.
In the event that 5% is ever exceeded for this reason, the president of Yardeni Research said things could go differently: “This time we may find that 5% sticks around and then we will all wonder if the next step in towards six, or back to four.”
Investment firm SEI raised similar concerns in April, adding that this year’s persistent inflation data will only worsen the problem in the short term. With consumer prices remaining high, interest rates have remained unchanged, meaning there is no longer a rush to buy fixed income:
“We would not be surprised if 10-year government bond yields tested the 5% level again, even with the prospect of rate cuts on the horizon,” it wrote in a report. remark.
But according to Eric Sterner of Apollon Wealth Management, more pessimism would have to enter the markets to justify a move beyond 5%. Only if inflation causes the Fed to raise rates would that be a concern, but it doesn’t doesn’t seem likely.
Yet interest rates are not falling quickly while inflation remains persistent, he told BI:
“If we can make that one rate cut, we could potentially get closer to 4%,” he said. “But I don’t think we’ll get below 4%.”
The Dangers of 5%
When the 10-year yield broke the 5% mark last fall, traders panicked S&P500 fell nearly 6% from its peak to October low.
Part of that is due to the speed at which rates rose, Yardeni said, which is not the case this time.
“It was a more stealth move, done at a slower pace; it hasn’t caught anyone’s attention in the stock market yet,” he said. “Even the growth stocks have done well, even if they’re not supposed to do well when bond yields rise.”
But if we go beyond 5%, that could change. According to a note from Goldman Sachs, highs above 5% have historically led to negativity for stocks. In 1994, even strong profits struggled to lift stocks against higher returns.
Even Sterner agreed that this is a risk, but only in the short term: “Hypothetically, I think if we exceed 5%, it could trigger a market correction or a sell-off of 10% or more.”
Read the original article Business insider
