The yield on the 10-year U.S. Treasury bond has risen a percentage point since the start of May. That's a big move in relative terms, given that the starting point during this runup was just 1.63 per cent – and it is causing a tremendous amount of concern not only about the bond market (since rising yields mean falling prices) but also about the economic consequences: If yields continue to rise, they will affect borrowing costs.
On Monday morning, the 10-year bond yield moved above 2.6 per cent. Bespoke Investment Group has put the move into context, and it is dramatic: They found that the 10-year bond yield has risen an astounding 33 per cent above its 50-day moving average, which is the biggest move in at least 50 years.
"Talk about extended!" Bespoke said on its blog. "At what point does this see at least a short-term turnaround?"
The bond yield has been on the rise for about seven weeks, but has been attracting more attention now that the Federal Reserve has said it intends to slow down its bond purchases later this year, winding down a stimulus program known as quantitative easing or QE.
Fed chairman Ben Bernanke, during a press conference last Wednesday, didn't sound concerned about the rising yield, remarking that it was actually good news if the yield is rising in response to greater economic optimism.
A number of strategists also believe that rising yields are not necessarily a problem for the stock market. Savita Subramanian, equity and quant strategist at Bank of America, noted that yields are rising with declining inflation expectations – an unusual combination, but one that was seen before, in 1994. Back then, technology stocks and health care stocks peformed well with rising rates, while utilities fell.
The key now, she believes, is economic growth: "If the recovery becomes self-sustaining, we believe correlations with real rates could once again revert, and stocks could rise as real rates rise," Ms Subramanian said in a note.
Right now though, there appears to be little rotation within the stock market – and a whole lot of outright fleeing. Since June 18, the S&P 500 has fallen 5.3 per cent, or nearly 90 points, with all 10 subindexes deep in the red.
Materials are the worst performers, falling 5.7 per cent. Consumer staples are the best performers, but have fallen 4.5 per cent. In other words, not much difference here. Meanwhile, financials and tech stocks have fallen 5.3 per cent each and health-care stocks have fallen 5.2 per cent.
David Berman