Yields Rise as Dow Erases Early Losses
This article was originally published on ETFTrends.com.
The Dow Jones Industrial Average fell over 300 points in the early session as the ebbs and flows of volatility made a reappearance with the index erasing its previous losses to post a mild gain before settling to a 20-point loss as of 1:20 p.m. ET. Treasury yields followed the rise in U.S. equities as the benchmark yields edged higher, highlighting the confluence between the stock and bond markets that have been seen as of late.
The lockstep between stocks and bonds as of late is not something typically seen within the capital markets as both are prone to marching to the beat of their own drum. Last week's equity sell-off was paired with rising yields as the capital outflows from both markets resulted in a sea of red across the two capital markets.
“Right now, if you look at the correlation between stocks and bond yields, it’s at the lowest to turning negative since 2014,” said Bloomberg contributor Sarah Ponczek. “That has only happened three times since 2000. Every time that did happen, it was followed by an equity market sell-off so this is something people are going to definitely be watching.”
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Treasury note yields received the brunt of the blame for last week’s stock sell-off as benchmark notes went on a weeklong ascent, pushing to new highs that caused investors to fret. Today, benchmark yields ticked lower in the early trading session before rising as stocks pared down its early losses--the 10-year note edged higher to 3.169, while the 30-year note went up to 3.34.
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Short-term maturities also ticked higher with the 2-year note going to 2.878 and the 5-year note rising to 3.032.
“It’s a bull market in stocks and it will continue until it ends, and no one knows when that will be," said Bill Miller of Miller Value Partners. " It will end when either the economy turns down and earnings decline, or when interest rates rise to a level where bond yields provide significant competition for stocks."
This week, investors may slowly be returning to the bond markets as flows into short- and long-term corporate bond ETFs were highlighted by an uptick in volume. ETFs like the Vanguard Short-Term Corporate Bond ETF (VCSH) and the iShares Long-Term Corporate Bond ETF (IGLB) saw an increase, according to Brian Gilman of ETF Sales & Trading at Virtu Financial.
"In fixed income, there was some bid back in a few corporates names on the upbeat sentiment as both VCSH (short term corporates) and IGLB (long term corporates) saw better buyers throughout the day and traded good volumes," said Gilman.
VCSH tracks the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index–a market-weighted corporate bond index with a short-term dollar-weighted average maturity. In addition to VCSH allocating capital towards debt issues that are investment-grade, fixed-income investors will like the reduced exposure to duration with maturities between 1 and 5 years.
IGLB seeks to track the investment results of the ICE BofAML 10+ Year US Corporate Index, which measures the performance of U.S. dollar-denominated investment-grade corporate bonds that have a remaining maturity of greater than or equal to ten years.
Trump Calls Fed His 'Biggest Threat'
U.S. President Donald Trump has often expressed his discontent for rising rates, and he reiterated that sentiment, calling the Federal Reserve his "biggest threat" in an interview with Fox Business Network. President Trump acknowledged the central bank's independence, but also derided the latest rate hikes announced by Fed Chairman Jerome Powell.
“It’s independent so I don’t speak to him, but I’m not happy with what he’s doing, because it’s going too fast,” said President Trump.
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