|Dow||+64.33 to 18,076.27|
|S&P 500||+4.47 to 2,114.07|
|Nasdaq||+22.71 to 5,099.23|
|10-YR Yield||+0.10 to 2.366%|
|Gold||-$8.60 to $1,185.80|
|Crude Oil||-$1.60 to $59.66|
Wall Street has gotten very used to falling interest rates. But those days are rapidly coming to an end.
Treasuries are tanking in price, while yields are surging right up to key technical levels, amid a slew of fresh reports and data.
They generally point to improving foreign economies, a bottoming out in deflation risk, and a rebound in beaten-down commodities prices.
Take a look at this chart of the yield on the benchmark 10-year Treasury Note:
You can see that yields spent most of 2014 and early 2015 falling – to as low as 1.65% from just over 3%. But today, the 10-year yield zoomed as high as 2.39%, testing the six-month high it touched at the beginning of May. A breakout here could lead to a move as high as 2.6%-2.7% in the not-too-distant future — pushing rates on things like long-term mortgages higher.
On the flip side, investor losses are piling up in Treasuries and other bonds. Here’s a chart of the Vanguard Extended Duration Treasury ETF (EDV), one of the longest-term, liquid U.S. ETFs.
You can see that it topped out way up around $142 in January … but has since plunged to $112 and change. That’s a loss of around 21% in just five months, on supposedly “safe” U.S. government bonds.
The latest rally in yields got started in Europe yesterday, when May inflation figures came in hotter than expected. News from ADP this morning added more pressure. The private payrolls company said the U.S. economy created 201,000 jobs in May, up from 165,000 in April.
Then European Central Bank President Mario Draghi piled on, saying at a post-meeting press conference that he thinks European inflation is bottoming out and that the European economic outlook is starting to improve.
|“My advice for some time has been to stay the heck away from long-term bonds.”|
The result? Even more bond selling. As a matter of fact, yields on German benchmark bonds are suffering their biggest 48-hour yield surge since 1998.
My advice for some time has been to stay the heck away from long-term bonds. They offer nowhere near the yield cushion you should demand for the price risk they entail.
I also believe that the move in yields could benefit some core bank and financial stocks, as well as cheap, economically sensitive sectors like energy — at the expense of sectors like utilities and REITs. So you may want to adjust your portfolio more in favor of the former and away from the latter.
So what do you think about this move in yields? Is this the start of a sustained rise in interest rates and decline in bond prices? Or is it just another short-term spike? What about inflation and foreign economic growth – picking up … or not? Have you trimmed your long-term bond holdings, or added sectors like financials and energy to benefit from these developments?
The Money and Markets website is your best outlet – post your thoughts there as soon as you can.
|Our Readers Speak|
Should we be encouraged … or worried … about all the M&A out there? And what about the latest debacle at the TSA? Those are a couple of the topics that had you fired up at the website.
Reader Mike P. said he’s encouraged by the latest spat of deal-making, saying: “I see the surge in M&A as a good sign for the future. It’s obvious companies are attempting to take advantage of cheap credit before interest rates rise.
“The fact that they are willing to do so at market highs is telling me they believe the trade-off between cost of credit and valuations favors cost of credit. In other words, they don’t expect valuations to fall significantly when rates do finally start to rise. It is prudent to do the M&A now rather than later.”
But Reader Reality Guy said that spending all this money on M&A is just another way corporations are helping to hollow out the U.S. economy. His take:
“Things won’t get better economically in the United States because corporations want to maximize profit to the managerial class by off-shoring labor to 3rd and 4th world workers in locations where there are no laws against exploitation.
“On top of this, the corporations want to evade U.S. taxes by using offshore havens to stash their profits. This brand of ‘vampire capitalism’ will continue to eviscerate/undermine any real growth to our country. If the majority of Americans have inadequate or stagnant job prospects/wages, how can they afford to support a growing economy?”
Meanwhile, on the airport security front, Reader Jim had the following observation on TSA incompetence: “The TSA has to be the most outrageous multi-billion dollar bill of goods ever sold to the American people. This is government waste at its worst.
“Have the 50,000 agents ever caught a single terrorist? The Israelis have superior security with only a handful of trained observers using standard profiling techniques.”
Thanks for sharing. It’s clear we need to get our airport security situation up to snuff, given the ongoing terrorist threats to the system. If anyone slips through the gantlet, it will have huge costs in terms of lives lost and economic damage.
As for M&A, I agree that it’s a sign of increased CEO confidence. But at the same time, we need to see more corporate wealth invested in workers, plant and equipment if we’re going to see the economic recovery broaden out.
Want to add anything else? Then here’s the link where you can do so!
|Other Developments of the Day|
The brinksmanship in Europe is continuing today, with Greek officials threatening not to ship a 305-million euro payment off to the International Monetary Fund unless creditors relent on certain bailout provisions. That’s the first of a handful of payments totaling 1.6 billion euros – money the Greek government can’t afford to cough up. Negotiations will continue over the next day or two.
Congress took the first step to roll back some of the post-9/11 measures that dramatically expanded the U.S. government’s surveillance powers. Thanks to new legislation, the National Security Agency will soon have to take additional steps to gain access to huge batches of phone call data, following a six-month transition period. Resistance to blanket anti-terrorism actions stemmed from the efforts of Kentucky Senator Rand Paul and others philosophically aligned with him.
On the economic front, the U.S. trade gap shrank to $40.9 billion in April from $50.6 billion a month earlier. Analysts attributed most of the improvement to the end of the West Coast port strike, given the strong dollar’s ongoing depressing effect on U.S. exports.
Boston police and FBI agents shot and killed Usaama Rahim yesterday, after the subject of an active terrorism investigation allegedly refused to put down a knife he was wielding in a threatening manner. A separate suspect, David Wright, was apprehended as part of the investigation.
What do you think of the new NSA restrictions? Will they make a difference? How about the latest phase of the Greek negotiations? How will they turn out? Share your comments over at the website when you have some time.
Until next time,