Bond yields could threaten a shaky market as they rise to their highest trading levels in over 10 years, reports an article in The Wall Street Journal. As interest rates have been raised, yields across the whole of the Treasury market have climbed so high that less than 16% of stocks in the S&P 500 are yielding dividends greater than the 2-year U.S. Treasury note.
With higher interest rates, investors are shying away from taking risks in the equity market. The S&P 500 is down 18% this year while the Dow Jones Industrial Average is down 15%, and though both indexes finished up at the start of the week (0.7% and 0.6%, respectively), all eyes are on the Fed’s meeting on September 21st to see whether markets will get a reprieve, the article contends. Many traders fully expect another interest rate hike of at least another three-quarters of a percentage point, but they’ll also be paying close attention to any clues Fed Chair Jerome Powell offers on how high interest rates will get and for how long, before the central bank starts to ease up.
Money managers who were hopeful after last month’s CPI report showed that inflation had fallen slightly had their hopes dashed last week when the newest report didn’t show that trend continuing. The Fed has indicated that it will want to see a downward trend in inflation over multiple months before it starts to ease up on the gas pedal of rate increases, even amidst a slowdown in the economy. Though consumer spending has remained solid and corporate earnings have been stronger than expected, investors are wary about how long those trends can last given the continued rate increases, according to the article.
While bond traders are pricing in a rate increase to about 4.41%, economists at Nomura are forecasting that rates will end up at 4.5% to 4.75% and Deutsche Bank is predicting rates may even hit 5%. And though much of that doom-and-gloom has already been priced into the markets, “things are still very murky” in the short term, Katie Nixon of Northern Trust Wealth Management told The Journal.