Treasury bond yield spike spooks stock market bulls

Treasury bond yield spike spooks stock market bulls

Yields saw their climb erased on Friday as US stocks swung between gains and losses, reflecting the tug of war between a classic flight to quality response and growing fears bonds are in a bear market.

Analysts at Mizuho point out that the two-year Treasury yield is now higher than the S&P 500's forward dividend yield, which prompts a "psychological test" for investors.

Since the start of the year, prices for developed-market sovereign bonds have been in decline, sending yields sharply higher.

"A big down day like Monday doesn't just go away".

So as bond yields keep on running up and equity markets continue to fall, you are getting whacked on both sides.

Volatility's grip on global markets tightened Thursday as surging Treasury yields renewed concern that higher rates will drag on the economy and pushed USA stocks lower for the fourth time in five days.

His data show "higher yields and superior equity returns have generally gone hand-in-hand".

"Given that for a long time the dividend yield on the S&P 500 was higher than the 10-year treasury yield, investors had gravitated from bonds to equities and their income", said Jack Ablin, Chief Investment Officer at Chicago-based BMO Private Bank.

"If 2.88 scared people why would they be comfortable with 2.84/2.85", said Schumacher.

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"You could get into a little bit of circular logic here, as you hand leadership back and forth".

Even if rates rise, experts say it's very unlikely that a bond fund would have losses as sharp as stocks are capable of. Investors who ignore market fluctuations and hold their bonds to maturity will always get their money back, plus they collect interest along the way.

The retreat in equities had been long awaited by investors as the market climbed steadily to record high after record high with few bumps.

"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. Analysts cited concerns about inflation and ballooning government debt for the earlier drops. Brenner said the USA yield was tethered to the German bund yield early Thursday, and both moved up together.

That means billions of dollars of demand is disappearing just as the Treasury plans bigger bond auctions, for the first time since 2009, to finance a growing deficit.

If the upcoming rise in rates is a smooth one, the increased payouts that bonds will make could help offset the drops in price that bond funds suffer and smooth out returns, said Chris Brown, a portfolio manager at T. Rowe Price. The Treasury offers $26 billion 3-year notes Tuesday. Traders are also facing the prospect of Fed rate hikes, which could cool growth.

United Kingdom gilts sold off and the pound rose after the Bank of England lifted its forecasts for economic growth and suggested it may need to raise interest rates faster than previously indicated.

"The cause of this correction is the ostensibly withdrawal of liquidity by central bankers, and consequently rising interest rates". United States bond yields rose sharply on Monday after official data released on Friday showed USA wages were increasing at the fastest pace since 2009. Dallas Fed President Robert Kaplan speaks at 4:50 a.m. ET in Frankfurt, Germany. "When that ball bounces out, it's going to spike", said Boockvar.

Philadelphia Fed President Patrick Harker speaks at 8 a.m. ET in NY, and both Minneapolis Fed President Neel Kashkari and Kansas City Fed President Esther George have 9 a.m. appearances.

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