Treasuries Turmoil Sparks Hope: The recent turmoil in the Treasury market has prompted a shift in sentiment, luring some investors back into the U.S. stock market after months of selling.
Equities fell as Treasury yields rose to 16-year highs, demonstrating the strong link between stocks and bonds. Higher bond rates offer an alternative to equities, raising company and family capital costs. This has changed over the past week due to lower-than-expected U.S. government borrowing and hints that the Federal Reserve is nearing the conclusion of its rate hiking cycle.
Bond prices move inversely to 10-year Treasury yields, which have fallen 35 basis points from October highs. The S&P 500 gained 5.9%, its biggest rise since November 2022. Despite falling 5% from its July top, the index is up roughly 14% year-to-date.
Jason Draho, Head of Asset Allocation Americas at UBS Global Wealth Management, notes, “The stability in rates is helping other asset classes find a footing. If equities move higher, you may find investors starting to feel as if they need to chase performance through the end of the year.”
Draho anticipates the S&P 500 to trade within the range of 4,200 to 4,600 until investors ascertain whether the economy can avoid a recession. The index currently hovers around 4,365. Several factors may be contributing to this positive outlook for stocks. Exposure to equities among active money managers is near its lowest level since October 2022, indicating an opportunity for contrarian investors to buy when pessimism prevails.
Also Read: Market Rally: Stocks Surge as Rate Hikes Take a Pause
Additionally, the final two months of the year tend to be a robust period for stocks, with the S&P 500 typically gaining an average of 3%. The best two weeks of the year for the index, marked by an average increase of 2.2%, commenced on October 22.
Ryan Detrick, Chief Market Strategist at Carson Investment Research, believes that the recent stock market rebound will carry equities beyond their July highs. Detrick points out that the market was oversold amid a robust economy, and the Fed’s slightly more dovish stance has ignited this rally.
Friday’s U.S. employment data showed a tiny increase in unemployment and the smallest pay growth in 2.5 years, suggesting a cooling labor market and supporting the Fed’s view. The S&P 500 rose 0.9% that day. Nevertheless, some investors remain cautious about returning to stocks. Apple Inc., a technology bellwether, offered a lackluster outlook for holiday sales, leading to a reduction in price targets by at least 14 analysts.
Nonetheless, analysts anticipate 5.7% earnings growth for S&P 500 companies in the third quarter, with over 81% of the 403 companies in the benchmark index that have reported profits exceeding estimates. Investors should also consider the potential for reversals in Treasuries. Betting against the Treasury market has been challenging for most of the year, as rebounds in government bonds were often followed by deeper selloffs. The 10-year Treasury yield remains significantly higher than its year-low.
However, there is concern that the seemingly ‘Goldilocks’ economy indicated by the recent jobs report may not be sustainable. Signs of softer-than-expected growth are currently benefiting both stocks and bonds, but there is a lingering fear that they may eventually raise concerns about an economic downturn. The interplay between stocks and bonds remains a critical dynamic to watch as investors navigate these uncertain waters.
Our Reader’s Queries
How to lose money on Treasuries?
There are several ways to lose money on bonds, including a drop in price due to interest rate hikes, default or bankruptcy of the bond issuer, call risk, reinvestment risk, and inflation risk. Any of these factors can cause a decline in the value of your bond investment or even result in a loss of your initial investment. It’s important to be aware of these risks and to carefully consider them before investing in bonds.
Are Treasuries a safe haven?
During times of uncertainty, Treasury bills, notes, and bonds are often viewed as a secure investment due to the U.S. government’s ability to pay claims. However, Fitch ratings recently downgraded the U.S. government and its bonds by one notch due to the debt ceiling brinkmanship that occurred over the summer. Despite this downgrade, these investments are still considered a relatively safe option for investors.
Who is the biggest buyer of US Treasury?
U.S. government debt is predominantly held by Japan, making it the largest non-U.S. holder.
What happens if China dumps US debt?
If China were to sell off their USA treasuries, it would result in a significant financial loss. This would cause the value of the treasuries to decrease, which would in turn increase the return for those who purchased the bonds.