The 2-year Treasury yield has had a strong move higher over the past few months. After surpassing the dividend yield of the S&P 500 Index in October, it hit another threshold on Thursday as it closed above the 2.0% level for the first time since September 2008, as shown in the chart below. What caused this recent run up?
There are a number of reasons for the move higher in short-term yields, but three of the biggest drivers are likely:
- Federal Reserve (Fed) rate hike expectations
- Anticipation of increased Treasury issuance
- Potential for higher inflation
We believe that inflation is a critical piece of the puzzle, as the core reading in last week’s Consumer Price Index (CPI) report came in above expectations, at 1.8% year over year. This is still below the Fed’s 2.0% target, but market expectations of future inflation, as measured by 10-year breakeven inflation (the difference between the yield on 10-year Treasuries and 10-year Treasury Inflation-Protected Securities), as well as the Fed’s 5-year, 5-year forward inflation forecast (a forecast of 5-year inflation, 5 years from now) are both just above 2.0% currently.
We think the Fed will remain gradual with rate hikes despite the inflationary pressures that are likely to emerge this year. Wage inflation has to rise to a greater degree than what current trends are indicating before levels threaten to force the Fed’s hand. Per John Lynch, Chief Investment Strategist: “Regarding inflation, we remain focused on wages, which on average represent more than two-thirds of business’ costs. If they’re not rising at a threatening pace, it’s hard to have a sustainable inflationary threat. Currently, wage growth is tracking to 2.5% year over year, but historically levels above 4.0% have been indicative of more persistent inflation and an aggressive Fed.”
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
Past performance is no guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Federal Reserve (Fed) is the central bank of the United States. Its unique structure includes a federal government agency–the Board of Governors–in Washington, D.C., and 12 regional reserve nanks (Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis).
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
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- Another strong week as domestic markets kicked off Q4 earnings season. Friday ended with all major indexes higher; Dow +0.9%, S&P 500 Index +0.7%, Nasdaq +0.7%, Russell 2000 +0.3%.
- Consumer discretionary, energy, financials led markets; rate-sensitive utilities, REITs underperformance continued.
- Treasury yields slightly higher; 10-yr. yield +1 basis point to 2.55%.
- NYSE breadth positive (1.2:1), Nasdaq (1.5:1), volume picked up a bit ~104% of 30-day avg.
- Commodities: WTI crude oil strength persisted (+0.9% to $64.34/bbl.), COMEX gold climbed +1.3% to $1339/oz., industrial metals mixed.
- Economic news: U.S. Consumer Price Index, retail sales data came back in line with expectations (+0.1%, +0.4% month over month).
US: S&P 500 Index +1.57%, Dow +2.01%, Nasdaq +1.74%
Europe: STOXX Europe 600 +0.29%, German DAX +0.32%, France CAC 40 +0.52%, U.K. FTSE 100 +0.19%
Asia: Japan Nikkei -.26%, China Shanghai Composite +1.10%, Korea KOSPI –0.04%
10-Year Treasury yield: +8 basis points to 2.55%, WTI crude oil +4.7%, COMEX gold +1.3%
It was another positive week for equities despite midweek jitters following reports that China’s central bank was mulling over the idea of reducing or even halting purchases of U.S. government debt. Continue reading
Speculation that China could be looking to reduce or even halt its U.S. Treasury purchases going forward has flooded media outlets recently and spooked investors. Following the news Treasury yields were sent to more than 10-month highs likely on concerns that significant changes to China’s Treasury holdings could trigger a sell-off in both bond and equity markets. Continue reading
- Domestic markets resumed their climb. China’s pushback on claims of reducing U.S. Treasury purchases and strong oil provided tailwind. Dow +0.8%, S&P 500 Index +0.7%, Nasdaq +0.8%.
- Energy and consumer discretionary up soundly; rate-sensitive utilities, REITs continue to underperform.
- Treasury yields moved downwards; 10-yr. yield -2 basis points to 2.54%.
- NYSE breadth widely positive (3.4:1), volume a little light ~98% of 30-day avg.
- Commodities: WTI crude oil started very strong, but closed the day flat at $63.57/bbl., COMEX gold +0.2% to $1322/oz., industrial metals closed mostly higher.
2017 was one of the least volatile years for the S&P 500 Index in history. With only eight 1% daily changes, not a single 3% pullback, and the lowest average CBOE Volatility Index (VIX) for a full year ever—2017 will go down in tranquility history.
Which brings us to an important question: What does it mean for 2018? Continue reading
- Domestic equities ended down across the board. Marking first broad, albeit slight, decline of the new year. Dow -0.1%, S&P 500 Index -0.1%, Nasdaq -0.1%.
- Financials were the standout performer; rate-sensitive utilities, telecommunications continue to lag.
- Treasury yields held mostly steady; 10-yr. yield held at 2.55%.
- NYSE breadth negative (1.6:1), volume above 30-day avg. (~108%).
- Commodities: WTI crude oil strength persisted (+0.7% to $63.41/bbl.), COMEX gold +0.4% to $1318/oz., industrial metals mostly higher.
- Fairly light economic calendar. EIA petroleum status report showed crude oil inventories posted 8th consecutive weekly drawdown (-4.9 million barrels).
January has certainly brought record-breaking cold weather to the Northeast, with some areas experiencing temperatures never felt before. The market, however, continues its hot streak.
As we hopefully move away from this cold spell and the weather starts to warm up, we will also be looking at January seasonal patterns in the S&P 500 Index that could help to keep your portfolio warm should the market cool off. Continue reading
- Stocks’ run continued Tuesday; S&P 500 Index (+0.1%) posted sixth straight gain amid broad risk-on sentiment. Dow +0.4%, Nasdaq +0.1%, Russell 2000 -0.1%.
- Sector performance mixed with rate-sensitive stocks among the biggest movers; financials +0.7%, telecommunications -1.8%, REITs -1.2%, utilities -1.0%.
- Treasuries mostly lower with yield curve steepening as the 10-yr. yield added 6 basis points (+0.06%) to end at 2.55%.
- NYSE breadth negative despite overall gains, volume approached 30-day avg. (~95%).
- Commodities: WTI crude oil spiked to >3 yr. high (+2.0% to $62.93/bbl.), COMEX gold -0.4% to $1315/oz., industrial metals mixed.
- Lackluster economic data failed to dampen risk taking; JOLTS job openings (+5,879k) below consensus (+6,025k), prior month (+5,925k); NFIB Small Business Index missed expectations (104.9 vs. 107.5).
- Major U.S. indexes mostly higher as markets gear up for next round of corporate earnings. S&P 500 Index +0.2%, Dow flat, Nasdaq +0.3%, Russell 2000 +0.1%.
- Utilities and energy led market performances; healthcare and financials lagged.
- Breadth on NYSE (1.4:1); NYSE volume ~96% of 30-day avg.
- Treasury yields turned in a flat performance; 10-yr. note finished yielding 2.48%.
- Commodities: WTI crude oil up +0.7% to $61.88/bbl., COMEX gold flat at $1320/oz., industrial metals closed broadly lower.