Stocks are falling, government bond yields are rising and investors are reacting strongly to the growing economic information, parsing it for even the slightest hint about the way forward.
Such sensitivity among investors has left the market nervous – oscillating between fears that the economy is running too hot and worries of a decline so sharp that the country would slide into recession.
The jitters are most evident in the $25 trillion market for U.S. Treasuries, where yields on government bonds have reached the highest level not seen since 2007. While the surge in bond yields reflects bets on a strong economy, the move has gone too far. Stock market also. For stock investors, higher yields are generally a negative — and the S&P 500 index is on track for its fifth consecutive weekly decline.
After the government reported Friday that employers added 336,000 jobs in September, far more than economists expected, stock futures, which allow investors to bet on the market before the official start of trading, fell and Government bond yields rose to 16 years. High.
It’s all about interest rates.
There are many different interest rates that matter. That’s the rate that the Federal Reserve sets, which is the target for the cost of borrowing overnight. There are consumer and corporate lending rates, such as on credit cards or mortgages. And then there are government debt yields, which partially track the Fed’s policy rate, but span much longer periods and also influence other information like inflation and economic growth.
Probably the most important of these rates is the yield on the 10-year Treasury bond, a measure of how much it would cost the U.S. government to borrow money from investors for 10 years, but it is also an important input to almost every other long-term interest rate. Is. rate in the world, making it the cornerstone of the global financial system.
It also impacts how companies are valued and hence, has an impact on the stock market. Higher Treasury yields signal higher costs for consumers and businesses, which generally weighs on the market.
This week, the yield on the 10-year Treasury bond rose to more than 4.80 percent, its highest level since 2007, from 4.57 percent late last week. The yield rose sharply above 4.8 percent after the report on Friday, after hitting that high point in the days before the jobs data was released. S&P 500 futures pointed to another decline, giving a loss of 1.6 percent for the week. The S&P 500 has declined nearly 7 percent in more than two months as yields have risen.
Rates have been increasing for some time. Now what’s so scary?
The Fed has been raising interest rates for nearly 18 months, but the yield on 10-year Treasuries remained fairly stable for the first half of 2023, fluctuating in the 3.5 to 4 percent range.
Over that period, the S&P 500 rose nearly 20 percent, boosted by better-than-expected corporate profits, slower inflation, a resilient economy and greater consensus about the end of the Fed’s rate-hike cycle.
But continued strong economic data has boosted growth expectations, while concerns that inflation remains too high have raised expectations that the Fed will have to keep rates on hold longer than before to accomplish the task of reining in prices. May have to be kept higher. As a result, in early August, yields on 10-year bonds began to rise sharply.
That move overturned some long-held market assumptions. After a period of relative stability, investors are reevaluating what higher rates could mean for consumers and companies, leading to a selloff in the stock market. The S&P 500 fell nearly 5 percent in September, its worst month so far this year.
Add to this a rapidly strengthening dollar – which is also linked to rising interest rates – and wildly fluctuating oil prices, and the outlook for the economy becomes even more uncertain.
“All these things have been put into a blender – the uncertainty and the pace of the way things are going is keeping the market uneasy,” said Jorge Goncalves, head of US macro strategy at MUFG Securities.
Is turmoil in Congress a reason?
The recent government shutdown and Tuesday’s removal of Kevin McCarthy as House speaker didn’t stir markets, but it exposed the government’s instability, just months after averting a potentially devastating debt default.
Rising interest rates have heightened concerns about the government’s finances, with the prospect of higher rates focusing attention on the rising cost of repaying the United States’ huge debt pile and persistent budget deficit.
Currently, unemployment is low and the economy is performing better than many expected. Ajay Rajadhyaksha, global head of research at Barclays, said if growth slows, the fiscal challenge facing Washington will intensify.
And assuming there are no spending cuts and rates remain high, Mr. Goncalves said, higher deficits could lead to higher yields, which in turn could push the deficit higher.