It’s amazing how quickly sentiment shifts. Just a couple of weeks ago, at around the time that the U.S. Federal Reserve released its latest monetary policy report, observers were confronted with what looked like a dramatic change in expectations: They threw out the possibility of another round of stimulus from the Fed and even entertained the possibility that the Fed’s soft-promise to keep its key interest rate “exceptionally low” at least through 2014 might not mean much.
The Fed itself was the source for part of this shift. In its policy statement, it acknowledged that labour markets have improved. Also, bond yields began to reflect a changing environment: The yield on the U.S. 10-year Treasury bond surged to 2.378 per cent, hitting its highest level since October as bond prices slumped (bond yields and bond prices move in opposite direction).
There was change afoot in the stock market, too, especially among financial firms. Life insurance companies, which have seen their earnings suffer tremendously with low interest rates, jumped. In particular, Manulife Financial Corp. rallied nearly 19 per cent from its early-March low. Bank stocks also did well, since a steeper yield curve allows them to borrow low and lend high, and take the spread as profit.
Well, all that was so last week. Now, it seems sentiment has shifted back to ongoing low rates, tumbling bond yields, weak financials and, hey, perhaps some more Fed stimulus on the way. Again, the Fed can take some of the credit here, after chairman Ben Bernanke said this week that further improvements in the U.S. labour market would require Fed stimulus. As well, there might be some second thoughts about just how strong the economy really is.
Either way, the yield on the 10-year U.S. Treasury has fallen for six of the past eight trading sessions, hitting 2.163 per cent on Thursday morning.
Financials were among the biggest laggards during Thursday’s stock market retreat, with stocks like Royal Bank of Canada down 1.8 per cent. Manulife has fallen a total of 4.9 per cent over the past three sessions, and was down 3.5 per cent on Thursday alone.
Meet the new era. Same as the old era.