Rising Bond Yields Weigh On Wall Street

Dow Jones falls the most in a day since 2008 financial crisis triggers losses in Asian markets

Toru Hanai Reuters

Yields on 10-year U.S. Treasury debt hit a four-year high of 2.885 percent, having jumped nearly 7 basis points on Friday.

While no major speeches by members of the U.S. Federal Reserve are set to take place, Monday will mark the beginning of a new chapter for one Fed member.

We are still a remote, narrow-based economy with a small and illiquid bond market.

Even after this week's recovery in bond markets, 10-year yields in Germany and the U.

Offshore fund managers have traditionally invested in NZ bonds as a straight yield enhancement on US Treasury Bonds. The rise in bond yields hinders stock performance in two ways: it makes corporate borrowing more expensive and it makes bonds more attractive to investors compared to riskier stocks.

Bond yields are rising as the Federal Reserve trims its USA bond holdings.

"This was crowd psychology at its best", said Daniel Wiener, chief executive of Adviser Investments.

It's not just higher wages that scare investors. "It will be, but not today". Exxon's 4.1 percent fall weighed the most on the Dow and was the second biggest drag on the S&P. The technology-laden Nasdaq was down six of its last eight sessions as markets opened Monday. While Japanese, European and Australian shares had decent corrections throughout the year of around 5 to 7%, the United States share market as measured by the S&P 500 saw only very mild pullbacks of less than 3%. Investors who ignore market fluctuations and hold their bonds to maturity will always get their money back, plus they collect interest along the way.

Selling hit all S&P sectors, though the S&P financial index.SPSY, down 5.0 percent, was the biggest daily percentage decliner, followed by healthcare.SPSY, down 4.6 percent.

It is an iron law of finance math (discounted cash flow, specifically) that future cash streams like corporate earnings and dividends are worth steadily more as interest rates fall. "It's not setting some new kind of record other than its rapid ascent".

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But if rising wages cement expectations that long-absent inflation is returning to a booming world economy, then bond markets are already scrambling to price in the greater risk to future value fixed income returns over time, sending long-term bond yields higher to compensate.

At 7:12 a.m. ET (1212 GMT), Dow e-minis were down 309 points, or 1.22 percent, with 76,519 contracts changing hands.

With this trend of mildly rising inflation, gold prices and T-bond yields will likely continue moving upward until there are signs of an economic slowdown and/or a bubble burst in stocks.

"The president's focus is on our long-term economic fundamentals, which remain exceptionally strong, with strengthening USA economic growth, historically low unemployment and increasing wages for American workers". Apple, Cisco, Intel and Microsoft were all on the upside as the rest of the 30-stock blue chip index went negative.

The stock market has been unusually calm for more than a year. The relative serenity over the previous year where markets seemed on a relentless, upward arc is an anomaly.

Investors Mutual Limited investment director Anton Tagliaferro said the share market correction is "well overdue".

It wasn't like this in past episodes of equity-market selloffs. There have been only four corrections in this long bull market, and this would be the fifth. This, combined with a very strong start to this year of 7.5%, very high levels of short-term investor optimism and lots of talk of a "melt up" left the USA share market overbought and highly vulnerable to a correction, which we may now be starting to see. A rise commodity prices also raises inflation. That catapulted 10-year Treasury yields - a key global interest rates indicator - to fresh four-year highs.

But inflation worries abound, with some harkening back to the grim economics of the 1970s when inflation soared into double digits.

"The service side of the economy was very robust in January", Tilley said.

"What we're seeing right now is an economy overall that is doing quite well and has strong fundamentals", said Gregory Daco, chief USA economist at Oxford Economics.

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