The quick move higher in bond yields is sending a warning about the stock market — especially growth stocks.
The benchmark 10-year Treasury has risen about 20 basis points since the start of the year — 1 basis point equals 0.01% — and was at 1.13% Monday. Still relatively low, the yield is at the highest it’s been since last March, but in itself the yield is not a problem.
The move could be signaling a period of more volatility for the stock market and the potential for more pressure on FANG and the other growth names that helped take the stock market higher last year. Some strategists expect those Big Tech and growth stocks to slow their gains this year, as value and cyclical names move higher on prospects that vaccinations will lead to an improving economy.
Strategists do not see yields at current levels halting the stock market’s gains, but the expectation that rates will continue to rise could make the ride bumpier for stock investors.
“I think the path of least resistance ... is still up. ... The technicals supporting this market are strong, but if you’re looking for warning signs there are some warning signs coming out of the fixed-income market,” said Mohamed El-Erian, chief economic adviser at Allianz.
El-Erian, in a CNBC interview, said yields have been rising on longer-duration bonds, such as the 10-year and 30-year bond, but the 2-year yield has stayed low, anchored by the Fed’s zero interest rate policy. The 10-year is widely watched, since it influences mortgages and other lending rates.
“It’s going up for the wrong reason, not because of growth but because of a combination of buyers getting hesitant and people worried about inflation, not reflation,” El-Erian said. “So if that continues, if you get another 20 basis points in another five or six trading sessions, then it’s flashing yellow a lot brighter at that point.”
The 10-year yield edged above the psychological 1% level last week after Democrats won two Georgia Senate seats, giving the Democrats control of the Senate. That prompted more selling in bonds, as investors speculated President-elect Joe Biden will now be able to push through his plans for trillions in spending. More stimulus means more debt and more Treasury issuance to pay for it, a recipe for higher yields. Yields move opposite to price.
Reference: CNBC
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