The S&P 500 recorded a record high for the second trading day in a row while a rally in tech stocks helped lift the Nasdaq to a record high. Investors are awaiting a key Fed decision later this week. Technology was the best performing sector in the S&P 500, with Apple gaining 2% and Facebook climbing over 1%. The yield on the US 10-yr Treasury rose to 1.5% after hitting a three month low last week.
Investors are eagerly awaiting for signals from the US Federal Reserve later this week about a timetable for scaling back ultra-accommodative policies. The decision is due Wednesday, with most economists anticipating the central bank will leave its policy mostly unchanged.
Here’s where US indexes stood at the 4 p.m. ET close on Monday:
“The largest increases were limited to used vehicles, energy and airfare,” said Nuveen’s Saira Malik. “Given the lack of evidence of rampant, widespread inflation, we remain confident in the Fed’s ability to stay on-message, even if discussions of tapering come a few quarters earlier than originally expected.”
The stunning rally in Treasury yields this year has stabilized for now but look for rates to resume their rise, says Bank of America, which foresees the 10-year Treasury marching up to a nearly two-year high of 2.5%. The 10-year yield hasn’t been above 2.1% since July 2019.
A spike in Treasury yields during 2021 has been a major focus for both bond and stock market investors. US debt has sold off massively this year in anticipation of hotter inflation rates that will likely accompany the US economy’s recovery from the COVID-19 pandemic.
Treasury yields rise as bond prices fall, with the march higher in yields implying more expensive borrowing costs for businesses and consumers.
The surge in long-dated yields, notably the 10-year yield’s rise to 14-month highs in mid-March, has largely cooled. The 10-year Treasury yield on Monday was around 1.587%, below the 1.76% level a month ago.
“We think technical factors combined with revised expectations on US growth are mostly responsible for the recent stabilization in US rates,” said Bank of America in a note Monday, saying the stabilization “subsequently justifies” a rally in emerging market and US equities and a selloff in the US dollar.
The 10-year yield, which is tied to a range of lending programs, during the first quarter scaled up quickly from about 1% at the start of 2021. Safe-haven bonds sold off as the US government rolled out more coronavirus vaccinations to millions of Americans and after lawmakers in March approved a $1.9 trillion fiscal stimulus program.
But now, “it should not be a surprise to anyone that the US economy will keep recovering at a fast pace. We started the year expecting 4.5% growth for 2021 and now we expect 7% and 5.5% for 2021 and 2022, respectively. The inability of US rates to selloff on the back of a strong March payroll number was the tipping point to stabilize the US rates market, the signal that most of the good news were priced in,” said Claudio Irigoyen, head of Latin America economics, equities, fixed income & FX strategy at Bank of America, in the note.
“[Global] investors significantly reduced risk exposure on the back of the selloff in rates in 1Q21. Positioning clean up. Since asset managers didn’t observe redemptions, cash levels were abnormally high, in particular for EM dedicated investors. Investors with cash on the sidelines were waiting for US rates to stabilize to redeploy capital into risky assets,” he said, adding that “price action was dominated by short-term flow pressure.”
Investors, meanwhile, are still keeping tabs on communication from the Federal Reserve. The central bank has signaled that it plans to keep its benchmark interest rates near zero until at least 2024 but market participants have been questioning whether the Fed can stand still in the face of hotter inflation, which it aims to do to accommodate the economic recovery.
“Despite the recent stabilization in US rates, we keep our forecast of 2.15% and 1.5% for 10-year and 5-year Treasuries by year end,” said BofA. US economic growth “can surprise updated expectations to the upside during the summer, combined with positive (i.e. higher-than-expected) inflation surprises,” it said.
“In addition, fiscal policy in itself will continue pressuring on real rates as more infrastructure spending is still more likely than tax hikes, adding more to the already sizable fiscal deficit. Finally, the Fed in itself remains an important source of volatility,” wrote Irigoyen.
Stock futures extended gains and Treasury yields rose Friday after a larger-than-expected addition of 916,000 US jobs in March underscored expectations the world’s largest economy continues to recover from the COVID-19 crisis.
The moves in futures and government bonds took place during the Good Friday holiday. Full equity trading will resume on Monday and the bond market will close early on Friday, at 2 p.m.
Economists surveyed by Bloomberg had expected, on average, nonfarm payrolls to climb by 660,000. The latest report also included upward revisions in January and February for a combined addition of 156,000 jobs.
“The equity market party is in the early stages as the US will likely add between 500,000 and a million jobs over the next few months,” wrote Edward Moya, a senior market analyst at Oanda, in a Friday note. “US stocks will remain attractive, but that could change quickly if Treasury yields start to surge again.”
Friday’s gains in stock futures suggested that Wall Street could see more record highs on Monday. The S&P 500 on Thursday powered through the 4,000 mark for the first time after President Joe Biden late Wednesday outlined an eight-year infrastructure plan to invest in upgrading and modernizing transportation systems, roads, bridges and broadband, among other items.
In the bond market, the benchmark 10-year Treasury yield rose to 1.70% as prices fell. The yield was at 1.68% before the March data. The 30-year Treasury yield also rose, to 2.357% from 2.328%. Bond yields have been climbing this year as investors price in expectations for further economic growth and higher inflation to accompany the expansion.
The US Dollar Index also gained ground, up at 93.04 from 92.86 before the payrolls report.
Oil prices were sharply knocked down Thursday, hurt in part by a dimmer outlook from Europe as the region battles rising COVID-19 cases counts and a sluggish rollout of vaccinations to curb the spread of the disease.
Brent oil, the international benchmark, extended its run of losses into a fifth session and West Texas Intermediate crude was in its sixth consecutive session in the red.
“Europe is struggling with COVID. Their pickup in crude demand is likely to lag the Americas and it’s probably going to really threaten a lot of hopes that we were going to see a big pickup this summer,” Ed Moya, senior market analyst at Oanda, told Insider on Thursday.
Brent oil fell 8% to $62.52 barrel and WTI fell by 8.3% to $59.25 per barrel.
Several European countries were recording a rise in coronavirus infections, prompting France on Thursday to declare new lockdown measures in Paris while Italy this week imposed movement restrictions.
Oil prices found no relief Thursday from the European Medicines Agency’s ruling that AstraZeneca‘s coronavirus vaccine developed with Oxford University is safe to use. The review came after several European countries suspended the vaccine’s use following reports of blood clots in some people who had been injected with the formula.
“You have a stronger dollar which has emerged from the surge in Treasury yields, which is also weighing on commodities as well,” said Moya. The US Dollar Index rose 0.5% to 91.87.
The 10-year Treasury note yield note yield surged past 1.7% on Thursday, marking a fresh 14-month high and the 30-year yield rose to 2.5% for the first time since August 2019. Higher yields tend to make the greenback more attractive to holders of other currencies.
While the outlook for European oil demand looks weakened by the COVID crisis, there are still expectations for stronger oil demand from the US with vaccinations on the rise, said Moya.
“It’s going to be a very busy summer travel season and I think jet fuel demand will also bounce back. We haven’t seen airlines really increase their flights…but once we start to see that, that’s going to be very positive for the demand forecast.”
US stocks turned higher Wednesday, with the Dow Jones industrial average and the S&P 500 closing at new record highs. Tech stocks recovered after the Federal Reserve reiterated its pledge to continue supporting the US economy as it continues to recover from the COVID-19 pandemic.
The Nasdaq Composite reversed course after losing more than 1% during the session and the S&P 500 clawed out of negative territory during afternoon trading. The run higher in stocks during the session came after Fed Chairman Jerome Powell said it was “not yet” time to begin discussions about tapering its purchases of bonds and other securities.
“We want to see that labor market conditions have made substantial progress toward maximum employment and inflation has made substantial progress toward the 2% goal,” Powell said in an afternoon press conference. “When we see actual data coming in that suggests that we’re on track…then we’ll say so,” and “well in advance of any decision to actually taper.”
The Fed at its policy meeting ended Wednesday left its benchmark interest rate unchanged, as expected. The Fed currently buys $120 billion a month in assets in part to help keep the financial system running smoothly as the worldwide pandemic persists.
Here’s where US indexes stood at 4 p.m. ET at the close on Wednesday:
Investors had earlier shoved down high-performing tech stocks as borrowing costs increased as implied by the 10-year Treasury yield. The yield approached 1.7% and reached its highest level since January 2020, which was before the COVID-19 outbreak was declared a pandemic.
The Fed upgraded its economic projections including its view that gross domestic product will expand by 6.5% this year, up from the prior estimate of 4.2%. Economists have said the vaccinations of millions of Americans and the $1.9 billion fiscal stimulus package from Washington are key factors in driving economic recovery. The Fed also indicated that no rate hikes will take place before 2023.
A climb in long-dated Treasury yields stoked by US growth expectations has contributed to investors yanking more than $15 billion from bond funds this week, the largest outflow in a year, according to figures released Friday.
Borrowing costs are stepping higher as implied by the 10-year Treasury yield which is tied to a range of loan programs. The pickup in borrowing costs has put pressure on equities, particularly highly valued tech stocks, in recent sessions including on Friday. The 10-year yield was pushed up to 1.639%, its highest in more than a year and the Nasdaq Composite dropped 1.5%.
Yields have increased as investors price in a potential rise in inflation as the US economy recovers from the impact of the COVID-19 pandemic that threw it and other economies into recession last year.
Concerns about US bond yields was a factor in chasing more than $15 billion from bond funds during the week ended March 10, said EPFR, a subsidiary of Informa that provides data on fund flows and asset allocation. The latest outflow was the largest in nearly a year, it said in a note Friday. Bank of America, meanwhile, tallied bond outflows of $15.4 billion.
This week’s bond auctions included the sale of $38 billion in 10-year Treasuries. This week also marked the signing by President Joe Biden of a massive fiscal package under which $1,400 checks will be sent to most Americans.
“While the specter of another wave of US Treasuries hitting the market contributed to the growing angst about global borrowing costs,” wrote Cameron Brandt, director of research at EPFR, “the $1.9 trillion worth of stimulus they will be issued to finance added fresh fuel to the global reflation narrative.”
He said that narrative has “lit a fire” under equity flows. Equity funds tracked by EPFR raked in more than $20 billion for a fifth straight week. That keeps stock-fund inflows on track for a new quarterly record as year-to-date flows “moved within striking distance of the $240 billion mark,” said Brandt.
Brandt also said weekly bond outflows were spurred by the liquidation of funds linked to Greensill Capital, a UK-based supply chain finance company that filed for bankruptcy protection earlier this week.
Gold prices Friday slumped to their lowest since mid-2020, under pressure as bond yields continued to spike while investors yanked money out of gold funds.
Gold prices fell as much as 3.4% to an intraday low of $1,714.90 an ounce on a continuous-contract basis and traded at levels not seen since early June 2020. For the week, the metal was on course to drop 3% and has lost roughly 9% so far this year.
There were outflows of $500 million from gold funds this week, according to Bank of America in its Flow Show update Friday. Gold funds logged the biggest weekly outflow since mid-November and their 16th in the past 20 weeks, according to fund tracker EPFR on Friday.
Gold’s been suffering at the hands of higher bond yields as well as gains for the US dollar. Yields on US government bonds have raced higher this week, making gold, which offers no yield, less attractive for investors to own.
The yield on the 10-year Treasury popped above 1.6% on Thursday, a sharp move from 1.3% in less than a week. Yields have climbed as investors sell off bonds in part as they price in inflation expectations on the view that the world’s largest economy will continue recovering from the recession brought on by the COVID-19 health crisis.
Dollar-denominated gold has also been weighed by a recent increase in the greenback’s value.
“The USD is bid as FX finally wakes up to what is happening in fixed income and equities around the world,” said Brad Bechtel, global head of FX at Jefferies, in a note Friday in which he pointed out a rise in the Bloomberg Dollar Spot index. That index rose 0.6% to 1,135 during Friday’s session, moving around its highest since early February.
While gold funds saw outflows, it was a “huge week” for inflows into equity funds of $46.2 billion, the third-largest ever weekly inflow, said BofA, adding that bond funds took in $7.1 billion.
The 10-year Treasury yield pushed close to its highest level in a year on Monday, as the outlook for economic recovery prompted investors to continue selling bonds and search for higher-yielding assets.
The yield hit 1.352%, just shy of a 12-month high of 1.374% logged on Feb. 24, 2020.
The yield on the note has climbed about 43 basis points since the start of the year when it was at 0.92%. Yields rise when prices fall.
The move is part of a broader rise in global bond yields that reflects expectations for further economic recovery and a related pickup in inflation as the COVID-19 pandemic subsides.
The latest signal of growth in the US economy arrived Monday from the Conference Board. The business think-think said its Leading Economic Index rose by 0.5% in January to 110.3, better than the 0.3% consensus estimate from Economy.
“As the vaccination campaign against COVID-19 accelerates, labor markets and overall growth are likely to continue improving through the rest of this year as well,” said Ataman Ozyildirim, the Conference Board’s senior director of economic research, in a statement. The group now expects the US economy to expand by 4.4% in 2021 following its contraction of 3.5% in 2020.
The 10-year breakeven inflation rate, which measures the market’s inflation expectations, was at 2.14% and recently hit its highest level since 2014, according to Bloomberg data. The breakeven rate is the difference in yield between 10-year Treasuries and 10-year Treasury Inflation-Protected Securities, or TIPS.
Bank of America on Monday said US yields have already reached its year-ahead targets, including the 10-year surpassing 1.30% and the 30-year bond yield above 2.16%.
“This is now realized, but it is over? The biggest risks to current trends include the long-term support levels nearby (yield resistance),” the investment bank said in a note Monday. As well, weekly resistance strength indexes are “starting to flash oversold” signs and bonds are looking undervalued against small-cap stocks “similar to the dot com and [Global Financial Crisis] era,” it said.
Investors ditching bonds have been putting money broadly into equities, fueling a 15% year-to-date surge in the Russell 2000 index of small-cap stocks.