Some bond investors saw buying opportunity in the benchmark yield’s16-year high
October 23, 2023
Investors have been waiting for the right moment to jump back in the frigid bond market. On Monday, some of them took the plunge.
A months long bond selloff helped push the 10-year U.S. Treasury yield above 5%on Monday morning for the first time since 2007. Some investors saw the milestone as a buying opportunity, quickly pushing yields back to 4.836%. Yields rise as prices fall.
The stock market’s response to Monday’s reversal was mixed. The Dow Jones Industrial Average fell 0.6%, or 191 points. The S&P 500 ticked down 0.2%, while the tech-heavy Nasdaq Composite rose 0.3%.
Stocks have stagnated in the second half as investors grapple with the possibility that the Federal Reserve will keep interest rates higher for longer, meaning bigger borrowing costs on everything from homes and cars to companies’ capital projects. Last week, Federal Reserve Chair Jerome Powell said the central bank could tighten monetary policy further if inflation doesn’t continue to cool.
That message has helped fuel the grinding run-up in benchmark yields in recent months. For investors, the question is when yields will peak, allowing bondholders to cement safe returns and ride out price gains that could come if central bankers lower rates for lending in the future.
“In our view, there’s going to be a giant sucking sound when the whole planet is going to want to lock in these rates,” said Ken Moraif , chief executive of Retirement Planners of America.
It is too early to say whether the 10-year yield’s decline on Monday was signal or noise. Fresh federal data on economic growth is due Thursday, while earnings season is set to kick off in earnest with closely watched forecasts that could offer snapshots of different sectors’ outlooks.
For Moraif, whose firm hasn’t held bonds since April 2022, there is only one arbiter for when the market will ultimately turn. “It’s the Fed, stupid,” he said. “That’s our metric.”
Any change would be good news for the tech firms that powered the stock market in the first half with the promise of huge future profits. As bond yields dropped Monday, shares climbed in each of the so-called “Magnificent Seven” companies.
Amazon.com rose 1.1%, Facebook owner Meta Platforms gained 1.7%, chip maker Nvidia increased 3.8% and automaker Tesla inched up less than 0.1%. Apple rose0.1%, even as Foxconn Technology Group , one of the iPhone maker’s biggest suppliers, said it is cooperating with Chinese probes.
Microsoft edged 0.8% upward, while Google-owner Alphabet ascended 0.7%.Both companies report earnings after Tuesday’s close.
About 73% of S&P 500 companies to report earnings so far have turned in better-than-expected results, according to FactSet. That is below the fi ve-year average of 77% for the same period.
“I’m nervous about earnings season,” said Leslie Thompson, chief investment officer of Spectrum Wealth Management. “So far, it’s been decent but it’s all about what the forecast is going to be.”
On Monday, shares in Morgan Stanley dropped 2% to their lowest closing price since February 2021. The bank said last week that profit fell about 9% from a year ago due to a sharp decline in Wall Street deal making.
The energy sector was Monday’s big loser alongside consolidation in the oil patch and falling crude prices. Chevron’s stock sank 3.7% after the company announced a $53 billion deal to buy Hess, which declined 1.1%. Meanwhile, benchmark U.S. crude dropped 2.9% to $85.49 a barrel, despite geopolitical risks from Israel’s war with Hamas.
PHOTO: JEFF CHIU/ASSOCIATED PRESS
In the U.S., hard-to-parse economic indicators have pushed investors such as Thompson to reconsider whether to keep clients’ cash into money-market funds or funnel it back into the bond market. Thompson switched to the latter about three weeks ago, opting for a mixture of corporate and U.S. government debt that matures in two to seven years.
Pointing to if and when Treasury yields will turn lower and stay lower, she said, “It’s hard to perfectly time those things.”
Spectrum Wealth Management, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Additional information about Spectrum’s investment advisory services is found in Form ADV Part 2, which is available upon request. The information presented is for educational and illustrative purposes only and does not constitute tax, legal, or investment advice. Tax and legal counsel should be engaged before taking any action. The opinions expressed and material provided are for general information and should not be considered a solicitation for purchasing or selling any security.