Published: Mon, February 12, 2018
Markets | By Rosalie Gross

Why rising bond yields causing pain to stocks

Why rising bond yields causing pain to stocks

Wall Street's bond market headache won't go away. The leak of a Federal Bureau of Investigation memo on Trump's Russian Federation "dossier" complied by a British ex-MI6 intelligence officer has also unnerved stock market bulls about rising political risk in Washington.

7-year -10 bps @ 2.665%. S. congressional leaders Wednesday reached a two-year budget deal to raise government spending by nearly $300 billion.

Benchmark 10-year notes last rose 5/32 in price to yield 2.8312 percent.

The dollar index was flat, with the euro up 0.11 percent to $1.2258. Both indexes were on track for their largest single-day losses since February 2016.

We already knew that high market valuations were likely to exacerbate volatility, as was the absence of any meaningful pullback in all of past year. In China, markets were overheated after a steep rise since the start of this year, said David Cui, China equity strategist at Bank of America Merrill Lynch. Jobless claims are released Thursday morning at 8:30 a.m. ET, but there's no major data until CPI and retail sales data next Wednesday.

"I think 2.90 could be broken at any point in the next 36 hours", said Andrew Brenner of National Alliance. It's been pretty ugly. This pushed up United States bond yields sharply, which in turn hit equity investor sentiments.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 2.2 percent to a two-month low. "Now they are saying we will take out the steroids, because it could have side-effects", said Nilesh Shah, MD at Kotak AMC.

"It looks to me like a typical type of scenario when you see a single stock flash crash where you'll see bids just disappear, stop orders get kicked", said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. Traders were bored out of their minds for much of 2017, when Treasury yields fluctuated within the tightest range in a half-century.

Speaking at a fixed-income conference in January, Bob Michele, head of global fixed income, currency, and commodities at JPMorgan Asset Management, said investors could "see a significant bear market".

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Koulajian pointed to the fixed income market as the main catalyst right now for near-term moves in the stock market.

"I think there's going to be an interplay between equities and rates probably for the next several months, until we get greater clarity on how the overall growth outlook is going to be and if the Fed is thinking about shifting the reaction function", said Mark Cabana, head of USA short rates at Bank of America Merrill Lynch.

"Global equity markets somewhat belated recognition of rising bond yields, along with fears that strong US jobs growth would prompt the US Federal Reserve to move more aggressively in rising rates, have combined to prompt the current market sell-off, in the absence of any fundamental factors that could derail the markets".

USA crude CLc1 fell 1.99 percent to $64.15 a barrel, while Brent LCOc1 fell 1.4 percent to $67.62. Even before the budget deal, the Treasury is ramping up new debt issuance to pay for tax cuts and entitlements. The more the bond yields rise, the more will be this opportunity cost. That compares with $420 billion net previous year in notes and bonds. "At the margin, the buyer, the asset owner, is slightly enticed to put more money into fixed income than into the equity market".

Since the bond scare began about a week ago and the 10-year Treasury yield hit a four-year high of 2.88%, the Dow Jones industrial average has tumbled as much as 10.7% from its January 26 high and has behaved erratically.

"The cause of this correction is the ostensibly withdrawal of liquidity by central bankers, and consequently rising interest rates. If you sell stocks, and they crash, yields come back down", said Art Hogan, chief market strategist at B. Riley FBR.

Boockvar said the USA bond market is responding to rising German bund yields, which are expected to keep rising.

Fed speakers will get a lot of attention Thursday.

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