The markets are no strangers to delayed reactions as investors digest many different influences on a post-pandemic economy. And one arrived in the bond market in earnest yesterday. Treasury yields surged back to levels last seen in the middle of the summer. After taking the Fed's hawkish tilt, telegraphing tapering and pulling forward rate liftoff expectations on the dot plot, pretty much in stride on Wednesday, traders went the other way yesterday.
The curve, as measured by the gap between the 2-year Treasury and the 10-year, had flattened after Fed chief Jay Powell's press conference, with the gap narrowing about 4 basis points. Yesterday saw steepening, with the gap jumping more than 10 basis points. It now stands around 117 basis points. The 10-year yield saw its biggest one-day move since February, pushing above 1.4% for the first time since early July. It's seen a ceiling of about 1.8% this year.
"Take a step back and just think about how low yields are even relative to where we were in the first quarter of this year," Zachary Griffiths, Wells Fargo macro strategist, told Reuters. "We do have very high inflation, high economic growth forecasts and it's really been kind of hard to justify where yields have been up to this point."
The 30-year Treasury yield surged more than 13 basis points for its biggest one-day move since March 2020 when the Fed announced QE round one.
(NYSEARCA:TBT) (NASDAQ:TLT) Real yields, the difference between nominal yields and inflation, were a driver of the move, with the 10-year TIPS now at -0.9%.
(NYSEARCA:TIP). That puts the 10-year breakeven inflation expectation at 2.33%, around the lowest they've been since the highs in May.
LPL Financial's Ryan Detrick says the 10-year yield could break out of its range this week, with today's trading crucial to the weekly chart. It's "on the verge of moving higher," he says.
Delayed Reaction: The run-up in yields didn't really start until just before stocks opened on Thursday, underscoring the argument that investors should be wary of Fed-day moves. A lot of short and long positions are unwound in a very short space of time right after the FOMC statement is released. But by the next day, the market began to look at a global landscape where central banks, the ECB excluded, are removing historically high accommodation.
"A hawkish Fed meeting, with the dots increasing and the end of QE potentially accelerated, didn't quite have the ability to move markets but the global dam finally broke yesterday with Norway being the highest profile developed country to raise rates this cycle (expected), but more importantly a Bank of England meeting that saw the market reappraise rate hikes," Deutsche Bank's Paul Reid writes in a note. In addition, as bond prices fell, sell stops were triggered, adding to the technical impact of the move.
Stocks holding up: Even with the pressure higher yields puts on megacaps and other stocks with high valuations that have underpinned the stock market, the major averages closed higher thanks to reflation plays. The S&P 500
(SP500) (NYSEARCA:SPY) is now in positive territory for the week and closed above its 50-day moving average, providing some support for today's trading. Equity investors appear to be looking at the Fed moves as a sign of confidence in the recovery and a commitment to combat inflation.
"While we are far from the end of QE and near-zero rates, the tide seems to be beginning to change," Anu Gaggar, global investment strategist at Commonwealth Financial Network, told Bloomberg. "So far, the market had welcomed bad news as good news, but a market reacting to signs of an economy able to stand on its own without the monetary policy crutches is a refreshing change." (
2 comments)
EmoticonEmoticon