Firm yields push dollar to a four-month high

“S. debt more attractive than bonds from other countries”.

On March 30, 2018, I wrote “What’s going on in the bond market?“. Traders are pricing in even more than that. In February, the specter of accelerating wage growth sent USA yields to four-year highs just below 3 percent, which played a role in the equities correction that followed. Let’s say a note has a face value of $1000.

The Federal Reserve is expected to raise short-term interest rates at least twice more this year and three times in 2019, in an effort to tap the economy’s brakes. Yesterday’s PMI data was fairly encouraging, suggesting that the world’s largest economy got off to a good start in the second quarter of the year. However, it falls in times of bullish investor confidence.

The gross external debt of the US government – Treasury bonds and other debts held by overseas investors – reached $6.5 trillion at the end of 2017, up from $2.6 trillion in 2008.

Yields have also risen at the short end of the curve, with the U.S. 2-year yield having reached a high of 2.483 per cent this week, the highest since September 2008. Treasury notes have to beat inflation, as a result; that is, if you spend that $950 in 2006, from our example above, it needs to have a return better than inflation, which in this case would be $1135 in 2016. Higher yields make the burden of everything from mortgages to student loans and vehicle payments even heavier.

Pollack added that this week’s Treasury auctions of two-year, five-year and seven-year notes are likely to set a record in terms of size. The biggest economic action out of Washington, D.C., might be the Fed raising interest rates – a clear negative for stock-market investors.

Rising interest rates pose several problems for stocks in particular. An advancing greenback tends to weigh on commodity prices, and the jump in West Texas Intermediate prices has been the key driver of the advance in breakeven inflation rates.

“The question of course is how long can this last”, said Peter Boockvar, chief investment officer of Bleakley Financial Group, noting that current debt levels for S&P 500 companies outside of banks are at extremely high levels. So, if bonds collapse, a lot of pension funds could get in trouble.

American consumers would get hurt by a bond market collapse as well.

The spread over neighbouring Spain – another closely watched metric seen as a proxy for investor sentiment towards the bloc – briefly touched its tightest level since mid-January.

If 3 % is indeed a line in the sand for equity investors, we should expect increasing sector rotation out of equities into bond markets which should accelerate significantly on the 3% break.

United States stocks spent much of the morning in positive territory as investors looked ahead to a heavy week of earnings and economic data.

Asset prices, currencies and borrowing costs around the world are steered by movements in US government bonds, considered by many investors to be the ultimate safe asset. Not being able to sell bonds is part of what sunk Toys R’ Us, for example. “There’s no hard and fast rule that rising rates have to be hard for stocks”. Interest rates peak near the end of an economic boom. Buying a vehicle, refinancing a student loan, even using a credit card could potentially cost more depending on how this all shakes out over time.

But there will be lenders who will “stubbornly keep their rates as low as they can for as long as they can”.