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Rapidly rising Treasury yields often rattle stock market investors, but a large jump in rates saw major indexes refuse to fold so far this week.
It’s all down to why investors think rates are rising, according to a closely followed Wall Street analyst.
“Equity markets are, for now, calling the bond market’s bluff by assuming it is merely momentum — not true economic signals — forcing rates higher,” Nicholas Colas, co-founder of DataTrek Research, said in a Wednesday note.
The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
jumped 13.7 basis points Tuesday to 4.846%, its highest close based on 3 p.m. ET levels since July 25, 2007, according to Dow Jones Market Data. The 30-year T-bond yield
BX:TMUBMUSD30Y
ended at 4.951%, the highest since August 2007, while at the short end, the 2-year note yield
BX:TMUBMUSD02Y
rose to 5.212%, its highest since August 2006. Yields and debt prices move opposite each other.
Stocks barely budged, with the Dow Jones Industrial Average
DJIA
eking out a small gain, while the S&P 500
SPX
saw a marginal loss.
The ability of stocks to hold their own while Treasury yields jumped in the wake of a very strong September retail sales report was remarkable, Colas said. Higher yields can unsettle stocks due to their long history of dampening economic growth, he noted, while the bond market also seems to be indicating the Federal Reserve is making a policy mistake by not moving to raise official interest rates in an effort to cool the economy. Treasury yields continued to march higher early Wednesday. Stock indexes were moderately lower, but remained up for the week.
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The stock market’s resilience indicates investors are questioning the idea that the bond market is the smartest money in the room — at least for now, Colas said.
On one hand, the setup is “heartening” and also consistent with seasonal patterns that favor stocks into year-end, Colas said.
But he added a note of caution: “Even still, one must wonder what the catalyst will be for lower interest rates in the near future. Geopolitical risk tops our list, but it is a fine line between just enough uncertainty to cool rising yields but not so much as to spook equities.”
