Wall Street’s main indexes recoiled from record highs on Thursday as surging U.S. Treasury yields took the shine off stocks now that a strong economic recovery looked more certain and investors clung to concerns that inflation would rise.
The S&P 500 was down more than 2% at one point, and retreating technology stocks dragged the Nasdaq down more than 3% as the benchmark 10-year note yield surged more than 20 basis points to a one-year high above 1.6%.
That surge put the 10-year interest rate above the 1.48% S&P 500 dividend yield, wiping out the strong advantage that the stock market has held over bonds during the pandemic.
MAX GOKHMAN, HEAD OF ASSET ALLOCATION, PACIFIC LIFE FUND ADVISORS, NEWPORT BEACH, CALIFORNIA
“It’s really related to the Treasury auction. We had an auction for 7- year treasuries which really was quite under bid. And that cause the 10-year yields, generally a steeper curve to permeate very quickly. That really just shocked the market. There’s a lot of concerns about inflation becoming a little bit too high and becoming a headwind especially for tech stocks.”
“The concern is that we haven’t been in an environment of persistently rising inflation expectations so it creates this new dynamic for investors.”
“The market is stretched, a lot of forward growth expectations have been baked in and that’s creating some of the excuse to blow up steam for some investors who were a little too bullish.”
TOM DI GALOMA, MANAGING DIRECTOR, SEAPORT GLOBAL HOLDINGS, NEW YORK
“We had a very weak seven-year auction, it tailed by almost 5 basis points, and it was just all out panic and everything just got sold, because they didn’t know what the next trade was going to be. We’ve rallied back a bit…A lot of stops were probably hit, that probably had something to do with it.”
“I think if you look at the equity markets, this rate risk is starting to play a role in the Dow and the Nasdaq. I think for the most part this move that we’ve seen in interest rates globally, whether it’s the big move in Australia and New Zealand last night, or the moves that we’ve been seeing in Europe, we saw a big rate move in Canada, for example, this morning…Rising rates are starting to have an effect on equity markets, certainly, and it doesn’t look like we really have much in the way of buy interest coming in.”
“It just looks to me like accounts are trying to make sales, mainly because they are afraid of the reflation trade that’s going on. We’ve gotten a lot of positive news on the vaccine, COVID infections are down, there just seems to be a lot of good news that’s starting to play out and I think that’s one of the reasons why the bond market is pushing to higher yields.”
“What we’ve noticed is that a lot of the activity that’s been talked about and been seen is really in the futures and options market, and also in the swaps market, which tends to be convexity related type activity. And also in futures. When you get high volumes in futures its usually quant funds, also known as CTA funds…CTAs that end up taking a trend and going with it. They get to technical levels and then all of a sudden they just sell futures, or buy futures, depending on what the market’s doing. So I think those two things are happening.”
PETER TUZ, PRESIDENT, CHASE INVESTMENT COUNSEL, CHARLOTTESVILLE, VIRGINIA
“It’s an exciting day on the market. Rates matter. We’ve seen the 10-year Treasury yield go from below 1% to 1.5% pretty quickly. At 1.5%, the yield is comparable to S&P 500 dividend yield. And there’s no capital risk with a 10-year, you’ll get your principle back. And all of a sudden it’s competitive with stocks.
“On top of that you’ve had an equity market that’s hit record highs many times this year and it’s expensive relative to historic norms. We were primed for a sell-off and we’re getting one.
“I ignore (the meme stocks), but what they do is point to how speculative in some ways the market is. When you have this small group of stocks acting irrational it puts it in people’s minds that these things can fluctuate up and down and they don’t want any part of it. The meme stocks volatility scares people out of the market in general.
“We’ve had a great market and we have these sell-offs driven by interest rates. You see a lot of corrections in individual stocks because of guidance. Returning to normal is painful for shareholders.”
MICHAEL ANTONELLI, MARKET STRATEGIST, BAIRD, MILWAUKEE
“We had a Treasury auction and the auction result was really sloppy. Rates are having big moves today. The 10-year, the five year yields have been rising throughout the day. The market is really focused on the interest rate world right now, what they’re saying and how fast they’re moving.”
“The auction had a big tail to it … there was not a lot of demand.” he said so as a result “The 10-year yield and the 5-year started spiking around 1 PM EST. People were selling bonds.”
“When yields rise rapidly that scares the stock market.”
“In a low interest rate world a lot of big names and popular stocks do well. When rates rise those kinds of stocks go out of favor.”
“Rising rates is kicking off a rotation from all those hot popular tech names into cyclicals and banks and energy.”
MICHAEL PURVES, CHIEF EXECUTIVE, TALLBACKEN CAPITAL ADVISORS, NEW YORK“The rate market is getting very dynamic. There have been a lot of rate rises since last August, but this has been the first one that has created a disorderly Treasury sell-off. Given how important Treasuries are to everything, that creates all sort of ripples.”
“The bond market is starting to look like a different landscape. There will be more interest rate hikes in 2023, which is pretty far away but not that far away. When you’ve had zero rates forever, and then those are not quite forever, that’s very disruptive to how markets are wired. But I don’t think it’s a fire alarm.”
“A lot of equities have gone up too much, too fast. Ultimately, there’s rate sensitivity.”
ARNIM HOLZER, MACRO AND DEFENSE CORRELATION STRATEGIST, EAB INVESTMENT GROUP, PHILADELPHIA
“There is a concern that despite the Fed saying they are not going to do anything about interest rates, the level of inflation might get away from the Fed, and that will have a market impact…The Fed’s policy should be a calming message, but because of the amount of supply – Treasury debt – the market is beginning to interpret that as much more stimulus, without potential of a check or discipline. The fear is that excesses could develop in the meantime that twist risk-taking in the market to a place that is overly frothy. The market is trying to get ahead of that by getting conservative.”“The (yield) curve is telling you that growth is coming back with a vengeance, and if the Fed is not going to do anything about it, then you can speculate with impunity. The institutional crowd has concerns that at some point if we mean-revert, it’s going to be the big-cap names that are a source of liquidity. They’re going to prepare for that.”