US stocks dip as rising Treasury yields take steam out of market rally

Trader NYSE green
Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York, U.S., March 17, 2020.

  • US stocks fluctuated on Wednesday after disappointing labor-market data drove Treasury yields higher and sparked valuation concerns.
  • The US added 117,000 private payrolls in February, ADP said. That came in well below the 200,000 increase expected.
  • The report and sudden jump in yields offset optimism around the US having COVID-19 vaccines for all Americans by May.
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US equities traded mixed on Wednesday as stimulus optimism was offset by rising Treasury yields.

Early strength across stock sectors faded after ADP’s monthly employment report showed February job growth handily missing expectations. The US added 117,000 private payrolls last month, according to the report. Economists surveyed by Bloomberg anticipated a 200,000-payroll gain.

The reading signals the labor market is returning to growth after a nearly stagnant winter, but the weaker-than-expected data highlights just how difficult it will be for the economy to recoup millions of lost jobs.

Treasury yields swung higher soon after the report’s release. The move revived concerns of overstretched stock valuations and saw the tech-heavy Nasdaq composite underperform peers.

Here’s where US indexes stood shortly after the 9:30 a.m. ET open on Wednesday:

The modest decline follows similar weakness in Tuesday’s session. Valuation concerns led tech stocks to weigh on major indices. The Nasdaq composite sank the most, tumbling 1.7% into the close.

ADP’s labor-market data overshadowed new optimism around the nation’s fight against the coronavirus. President Joe Biden announced Tuesday afternoon that the US will have enough vaccine doses for every American by the end of May, pulling forward the key forecast by two months.

The news comes as the rate of vaccination nears 2 million doses per day on average, well above the 1.3 million pace seen in the final week of February, according to Bloomberg data.

Democrats, meanwhile, continue to push the president’s $1.9 trillion stimulus proposal to a Senate vote. The House passed the measure on Saturday, and Senate Majority Leader Chuck Schumer has said he aims to bring the bill to the Senate floor by mid-week. Biden ultimately aims to sign the package into law before expanded unemployment benefits lapse in mid-March.

The package is far from a done deal. Democrats are still haggling over some elements of the bill, including the size of a new supplement to unemployment insurance. The party needs all 50 votes to pass the bill through budget reconciliation, making any last-minute changes risky to the vote’s success.

Lyft rose after the company announced it enjoyed the best week for ridership since the start of the pandemic. Wedbush analysts on Tuesday named Lyft and Uber as top recovery plays, since reopening is expected to revive ride activity.

Bitcoin soared above $51,000 after trading as low as $47,118 on Tuesday. The run-up places the popular cryptocurrency at its highest levels since late February, when it tumbled from record highs.

Spot gold sank 1.7%, to $1,708.43, at intraday lows. The US dollar strengthened against Group-of-20 currencies and Treasury yields rose.

Oil prices shot higher amid the Treasury sell-off. West Texas Intermediate crude gained as much as 2.3%, to $61.10 per barrel. Brent crude, oil’s international benchmark, jumped 2.4%, to $64.18 per barrel, at intraday highs.

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The bond market is in rebellion over Biden’s stimulus – but not because it would be bad for the economy

jerome powell
Federal Reserve Board Chairman Jerome Powell.

  • The Treasury market is defying Fed messaging and signs of lasting economic damage.
  • Soaring yields signal investors expect the Fed to lift interest rates well before past estimates.
  • Fed officials will likely need to address the bond-market rout to avoid disruption to the economic recovery.
  • Visit the Business section of Insider for more stories.

The Treasury market has made it clear: the Federal Reserve is a downer.

Optimism toward the US economic recovery flourished over the past week. Daily COVID-19 case counts fell further from their January peak. Vaccinations continued across the country, hinting the pandemic could fade in just a few months. Economic data beat expectations. And Democrats pushed forward with President Joe Biden’s $1.9 trillion stimulus proposal, aiming to accelerate the rebound even more.

And yet, these encouraging developments fueled a sudden shock in the Treasury market.

Investors looking to capitalize on a swift recovery dumped government bonds and pushed cash into riskier assets. The 10-year yield soared as high as 1.614% on Thursday, its highest level since the pandemic first slammed the US. The jump immediately cut into stocks’ appeal and dragged major indexes lower throughout the week.

10 yr yield

The narrative behind the move is simple: The increased likelihood of new stimulus juicing the recovery lifted expectations for faster economic growth and inflation. Stronger price growth leads investors to demand higher yields.

Yet the market moved to such an extreme that it now stands in contrast with the Federal Reserve’s own forecast. The central bank has indicated it doesn’t expect inflation to reach its above-2% target until after 2023. The outlook suggests the Fed will hold interest rates near zero through 2023.

The sell-off in Treasurys, however, signals investors are pricing in a rate hike as early as the second half of 2022.

“We’re now getting to the point where the market isn’t necessarily believing what the Fed is telling,” Seema Shah, chief strategist at Principal Global Investors, told Insider. “We’ve now moved to a slightly more concerning ground, where it seems like the Fed’s messaging is not powerful enough.”

Too much of a good thing

Central bank policymakers have so far held their ground. The jump in yields suggests investors are expecting a “robust and ultimately complete recovery,” Fed Chair Jerome Powell said Tuesday. The chair reiterated that the Fed won’t cut down on asset purchases or consider rate hikes until it sees “substantial further progress” toward its inflation and employment targets.

At its core, the sell-off is merely part of the reflation trade, a strategy used to profit from stronger price growth. But the pace at which yields rose is cause for concern, Kathy Bostjancic, head US financial market economist at Oxford Economics, said.

Thursday’s leap was the biggest single-day move since December, and overall bond-market volatility rocketed to its highest since April, according to Bloomberg data. Finally, the gains came despite the Fed continuing to buy at least $80 billion in Treasurys each month.

Treasurys
Chart via BofA Research.

Since yields serve as the benchmark for the global credit market, a sudden rise can rapidly lift borrowing costs, sending rates for mortgages, car loans, and even utilities higher.

If yields gain too much, too quickly, the price action can be “destabilizing,” Bostjancic said. The shock would come as real unemployment still stands at around 10% and industries hit hardest by the pandemic remain far from full recoveries.

“It could choke off this nascent recovery before it gets going,” she said.

Others aren’t so concerned. Bank of America strategists led by Gonzalo Asis said the trend was less inspired by rate-hike expectations and simply a case of “buying the fundamental dip” before strong economic growth.

There’s room for yields to climb higher still, Bostjancic said. Real yields – nominal yields adjusted for inflation – remain negative, signaling there’s still enough weakness in the economy to warrant parking cash in the safe haven.

Looking back to look ahead

To be sure, this is far from the first time markets have abruptly reacted to tightening fears.

Concerns of premature tightening of monetary policy fueled the now-famous “taper tantrum” of 2013, when investors rapidly dumped Treasurys after the central bank announced it would reduce the pace of its asset purchases, fueling a sudden – albeit temporary – shock to the bond market.

The Fed will likely move first in this case  to avoid additional Treasury-market drama, Bank of America economists led by Michelle Meyer said in a Friday note. Updated economic forecasts set to be published after the Federal Open Market Committee’s mid-March meeting should offer some hints at when the Fed’s rate-hike criteria could be reached, the team said.

“The risk, however, is that the Fed won’t have the luxury of waiting for the next meeting and will have to respond to the abrupt market moves in speeches this week,” the economists added.

If the taper tantrum is anything to go by, communication is a difficult balancing act for the central bank. Powell has already said he doesn’t expect any stimulus-fueled jump in inflation to be “large or persistent,” but that commentary did little to calm the sell-off in Treasurys.

Unless the Fed further clarifies its inflation target, investors will remain in the dark as to when tapering could arrive, Shah said.

“There’s so much room for interpretation in terms of how long inflation has to be above 2%, at what level does inflation need to be above 2%,” she said. “That lack of clarity gives the market that room to wonder, ‘what does the Fed actually mean by that?'”

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