What Do The Bond Market Moves Mean for Stocks?
The bond market had a turbulent week, with yields on the 10-year Treasury note reaching their highest level since 2014.
Investors are closely watching this volatility as they try to gauge its impact on the stock market.
Some believe that the sell-off in bonds is a sign that stocks are headed for a correction, while others argue that it's simply a healthy rotation out of low-yielding assets and into riskier investments.
So what should investors make of all this? Here's a closer look at what's happening in the bond market and what it could mean for stocks.
What Is Causing The Bond Market Turbulence?
Former finance Minister Kwasi Kwarteng's "mini-budget" announcement on Sep. 23 sent shockwaves through the bond market.
The U.K. government's plans to increase spending and borrowing to fund a post-Brexit economic recovery sent yields on 10-year gilts soaring to their highest level since June 2016, while the yield on 30-year gilts hit their highest level since 2014.
The move surprised investors, who had been expecting the government to stick to its previous plans for fiscal austerity.
The announcements had a disastrous impact on the stock market, with the FTSE 100 tumbling and 41% of mortgage deals pulled in the wake of the news.
At the end of October, the Bank of England plans to begin its delayed sale of gilts as part of its quantitative easing program, which is likely to put further upward pressure on yields.
Over the pond, the bond market volatility is also at its highest since the 2008 financial crisis in the U.S.
With the Fed accelerating the reduction of its $9 trillion balance sheet, this will likely put upward pressure on yields and further widen the gap between short-term and long-term rates.
So What Does This Mean For The Stock Market?
Well, higher bond yields typically mean increased borrowing costs for companies which can weigh on profits and share prices. It can also make stocks look relatively less attractive compared to bonds from an income perspective.
That said, it's important to remember that the bond market is just one factor that can impact stock prices, and there are many other factors at play as well.
So while bond market moves can be closely watched, it's just one piece of the puzzle when it comes to analyzing the stock market.
The stocks-to-bond correlation is not as simple as some make it out to be. While a rise in bond yields can put pressure on stocks, it's just one factor among many that can impact stock prices. So while bond market moves are worth watching, don't forget to consider the big picture when making investment decisions.
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Alpesh Patel OBE