Anyone who closely follows a combination of investor and analyst ratings Reference rates From the Fed's Spring 2022, when their upward trajectory began, we could not have seen anything more remarkable: they never came within their projections. When we refer to forecasts, we are essentially referring to the related derivative product that is traded on the Chicago Stock Exchange and shows what investors expect from benchmark interest rates for the next eighteen months.
A very common mistake is that early investors are too quick to predict the outcome of the rate hike process and their over-urgency to initiate a reversal. For months now, as Governor Powell has made it clear that no further hikes are in the offing, investors' fortune-telling skills have struggled to predict the start of the rate cut process and its evolution.
Going back a few months, we recall that at the beginning of the year Chicago Stock Exchange instrument investors were almost certain to see five rate cuts of 0.25% by 2024.
This rating is largely due to the very good trend of the US stock markets since last October and the continuous records of the major US stock indices. Presumably, the corresponding records in Europe and Japan are partly credited for this assessment. The immediate result of these assessments was a very marked fall in yield Government Bonds of America.
The 10-year U.S. Treasury note, the most closely watched by stock marketers, has seen its yield fall dramatically. While they were close to 5% last October, they were poised to fall by nearly a percentage point to below 3.80% in early 2024. Similarly, yields on other U.S. government bonds saw a significant decline as investors considered a short start to the process of lowering benchmark interest rates.
But again, the assurance that Governor Powell and the Fed will rush to cut interest rates is unfounded. As the governor warned anyway, the start of that process would be a function of the path of inflation, and Powell and his colleagues estimated that there would be a maximum of three rate cuts by 2024. inflammation Its last three-month readings in the US have turned things upside down in the markets again.
The yield on US 10-year Treasuries rose again and is near 4.60% these days, approaching last October's level, which was the highest in the last fifteen years. Getting those yields back to higher levels could prove crucial for the US stock market, and not just that.
The problem with rising yields isn't just the borrowing costs for businesses. This is the increase in “competition” that stocks face as returns on safe investments are raised.
As the title of its analysts' report says Goldman Sachs As of last Monday, “Investment risk appetite is dampened by bond yields returning to their highest levels since 2008.” Apart from this, the continued strengthening of the US dollar as the strength of the US economy and inflation that is more persistent than in European economies is a factor holding back the equity markets.
As a result, US bond yields rose more than European bond yields, pushing the dollar higher. As we saw all too clearly in 2022, the performance of the US dollar generally does not do the markets much good. Under these conditions, we are not surprised by the difficulty faced by international stock markets in recent days.
It's not just concerns about developments in the Middle East that are worrying investors. The picture of rising bond yields may bother them more, at least in the US. As we read in Bloomberg, already a significant rise in yields is starting to attract buyers to US government bonds.
A “survey” conducted by JP Morgan of its clients revealed that they hold the longest positions in US bonds by nearly a month. At the same time, in the derivatives markets, there appears to be a gradual reduction in the “race” to predict further significant rises in bond yields. The findings, reported by Bloomberg, confirm that competition towards stocks has intensified and investment funds have started moving there.
On the one hand, this may be negative for demand for stocks, but on the other hand, it may indicate that many investors believe that the continuous rise in bond yields that began in January may be coming to an end, which would be nice. Stock markets.
Well-known Bloomberg columnist John Authors tackles the issue of rising bond yields and what it means for stocks. The authors first note the refusal to continue the decline in inflation that began in September 2023, and point out that part of its persistence is due to the fact that the global economy is stronger than many economists and investors expected (it is good to recall here that it has completely failed. , so far at least, the hope of many analysts, namely the US economy their certainty that recession is unlikely to be avoided).
The well-known columnist noted that while investors in the past were used to seeing stock dividend yields consistently outperform, they gradually stopped seeing them after 2008 when we entered into extremely low interest rates. Because markets often have what we call a “short memory,” the authors believe that a generation of investors who grew up seeing very low bond returns will have a harder time adjusting to new data (which isn't so new).
Of course, this doesn't seem to be the case yet, but it could happen if the rise in bond yields continues in the coming weeks and especially the $183 billion in new issues of US bonds expected to continue. The week was absorbed by investors with difficulty.
The related debate, like many debates about investment character, is not easy to reach a definite conclusion. However, this does not negate the fact that the delay in cutting benchmark interest rates has started troubling equity markets, which find some other investments more attractive.
It's hard to say what the situation will look like, especially as investors' anxiety over the chaotic situation in the Middle East has fueled oil prices and most of gold's new highs.
It is certain that the landscape for equities has turned less investor-friendly. This does not mean that we will necessarily see a significant drop in the markets, but more attention is needed now to monitor their trend. In particular, announcements of financial results of large international companies listed on international stock markets have started.
If there's anything to calm things down and worry investors, it's good company results and positive valuations for the immediate future. We will soon find out whether corporate performance markets can be given a “helping hand” or left alone to deal with the various threats that have emerged.
