Treasury yields rose to new milestones on Thursday as the week’s sell-off in bonds on rising economic expectations and inflation concerns accelerated, prompting a steep sell-off in equity markets.
The advantage that the S&P 500 dividend yield has held over the benchmark U.S. Treasury note during the pandemic has now been erased, a year after the collapse in interest rates set the stage for Wall Street’s resurgence in the wake of the coronavirus sell-off. The move higher in Treasury yields could make stocks look relatively less attractive compared with safer Treasuries; investors were particularly quick to dump the high-flying growth stocks of the Nasdaq Thursday.
The U.S. 10-year yield Thursday rose to a peak of 1.614 per cent, the highest in a year, and surpassing many strategists’ forecasts for where it would end the year. In Canada, the pace of the rise in long-term bond yields was just as notable, with the 10-year bond touching its highest level since January last year at 1.486 per cent before dipping to 1.457 per cent, up 14.2 basis points on the day.
Canada’s five-year government bond – closely watched because of its influence on the popular fixed mortgage rate of the same duration – saw an even greater spike in its yield on a percentage basis. By late afternoon Thursday, it was at about 0.96 per cent, rising from 0.75 per cent at the start of North American trade. It has now had its biggest move within a two-week span in a decade, doubling since just Feb. 11, according to Robert McLister, founder of the mortgage rate comparison website RateSpy.com.
“We’ve seen the 10-year Treasury yield go from below 1 per cent to 1.5 per cent pretty quickly,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Va. “All of a sudden it’s competitive with stocks.”
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, agreed.
“The market has done great, but this has changed the risk-reward,” he said. “Treasury bonds are seen as a safer investment. All stocks have risk, even dividend payers.” The dividend yield of the S&P 500 was at 1.45 per cent, according to Refinitiv Datastream.
Mr. Silverblatt noted that companies will be paying more money in interest, although less than before the coronavirus rocked financial markets. “There is a lot more debt out there now, companies have bulked up because they were worried about cash and issued shares and debt, we see that in all the statistics, and eventually it catches up with you.”
Treasury yields tumbled in February, 2020, as the COVID-19 pandemic shocked global financial markets and crippled much of the world’s economy. Simultaneously, falling stock prices created a spike in the S&P 500 dividend yield, even as many companies suspended payouts to shareholders.
The S&P 500 dividend yield reached 2.76 per cent in late March, a historically large premium over the 10-year Treasury yield of 0.76 per cent at that time, according to Refinitiv Datastream.
Since then, companies have largely resumed their dividends, with many even increasing their shareholder payouts. The S&P/TSX Composite Index has a dividend yield still well above the yield of the Canada 10-year bond.
A big move in the U.S. Treasury yield came in the early afternoon when an auction for US$62-billion of seven-year notes by the U.S. Treasury showed poor demand, with a bid-to-cover ratio of 2.04, the lowest on record according to a note from DRW Trading market strategist Lou Brien who called the result “terrible.”
The trading also pushed up a closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations. It went as wide as 141 basis points, the most since 2015.
Analysts said the trading showed investors positioning for price increases on goods and services internationally, even after top U.S. Federal Reserve and European Central Bank officials tried to talk down rising yields.
“It’s starting to become a momentum trade and the sell-off is becoming a global phenomenon,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale.
Fewer Americans filed new claims for unemployment benefits last week amid falling COVID-19 infections, Labor Department figures showed on Thursday, suggesting the labour market was slowly regaining traction.
Despite the broad market slide, GameStop Corp. shares surged again, leading a surprise resurgence of “stonks” championed online by retail investors. After doubling in the previous session, GameStop was almost 90-per-cent higher at its session peak but pared gains to close up 18.6 per cent.
Analysts were puzzled by the new rally. Some ruled out a short squeeze like the one in January that battered hedge funds that had bet against GameStop and were forced to cover short positions when individual investors using Robinhood and other trading apps pushed the video game retailer’s shares as high as $483.
Still, short-sellers are estimated to have lost US$818-million on Wednesday from bearish bets on GameStop, data from financial analytics firm Ortex showed.
“The power of the “three R’s” [Robinhood, Retail, Reddit] are back in play,” said Neil Campling, head of technology research at Mirabaud Securities.
The Dow Jones Industrial Average closed 559.85 points lower, or 1.75 per cent, to 31,402.01, the S&P 500 lost 96.09 points, or 2.45 per cent, to 3,829.34 and the Nasdaq Composite dropped 478.54 points, or 3.52 per cent, to 13,119.43. Canada’s TSX lost 260.99 points, or 1.41 per cent, at 18,223.54.
The Canadian dollar touched its strongest level since February, 2018, early Thursday, but pulled back later in the day to 79.3 cents as equity markets came under pressure.
With files from Reuters
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