From the Desk of Ian Culley @IanCulley
Borrowing costs are increasing, and US Treasuries are tanking – again.
Everyone knows it. Even my therapist commented on interest rates and the “terrible” economy.
The 30-year T-bond has hit our initial target. And the 10-year is within striking distance.
So much for limited downside risk for the bond market. Perhaps the call for a 5.25 print on the 10-year yield by Christmas wasn’t aggressive at all.
But elevated yields aren’t the problem…
And I don’t care about the economy when it comes to market speculation.
Remember, we don’t trade the economy. We trade the markets or – more precisely – price.
Interest rates hung around decade highs earlier this year while the Nasdaq 100 enjoyed its best first half since its inception.
Stocks like it when interest rates loiter. But they don’t fare well as yields accelerate.
That’s why I’m more concerned with increased bond market volatility – not elevated rates.
Check out the S&P 500 ETF $SPY overlaid with the Bond Market Volatility index $MOVE (inverted):
I highlighted this chart in February as the MOVE index fell (rising line on the inverted chart) and stocks gained upside momentum.
The same message then applies today:
Risk assets need to be the hot ticket on the street. If bonds are receiving all the attention, ripping in either direction, it likely implies systemic risks for the overall market.
All markets will feel the effects if bonds – the largest asset class in the world – experience turbulence.
The key difference between then and now: Bonds are falling at an accelerated rate as yields rip.
The 10-year yield at 3.75 or 5.25 doesn’t impact the major stock indexes to the degree that many believe.
It’s not where yields are heading. It’s how they move.
The market continues to prove this point.
As long as interest rates hasten their step, stocks will be forced to navigate a treacherous path.
Stay tuned.
Countdown to FOMC
The market is pricing in a pause in the hiking cycle through Q2 of next year as the probability of another hike by December increases.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of October 5, 2023.
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