Turn Down the Volume

Turn down the volume.  Stocks had a mixed close yesterday on a low volume day.  Fed minutes indicated its continued support while the Treasury department got deeper into its discussion about corporate taxes from international subsidiaries.


Yield signs.  Treasury yields are extremely important, of course they are.  However, many equity-centric investors, who may have even owned a bond or two in the past, have largely ignored the bond markets for many years. Bond yields were low by historical standards and the potential capital gains in stocks made bonds less appealing to profit seeking investors.  So, naturally many investors have a keen focus on equities.  I can’t remember the last time a client call started with something like “Can you believe how out of whack the term premiums on bonds have been?” or “Do you think the IBM 1.95% of 2030 will be called?”  No, I don’t get those questions anymore, but I do field lots of questions on Tesla, Bitcoin, SPACs, and the occasional question about a random needle-less drug delivery company with great potential.  You see, investors are looking for upside, lots of it, and they have gotten some very sizable upside in growth companies in years past.  Last year, it appeared that the coup de grâce was finally given to bonds when at the height of the pandemic and economic toil, growth stocks vaulted upward.  Bonds had been rallying for years and yields were hitting all-time lows.  Let’s look at 10-year treasuries.  Yields on the notes hit an all-time low of around 0.50% last summer.  That leaves about 50 basis points of upside to get to 0% yield.  The downside was unknown.  It was clear that yields would be suppressed as long as the Fed was buying bonds in its QE operations, but once that stopped, there was no telling how far yields would climb – remember climbing yields mean falling prices, if you own the bonds.  So naturally, investors turned to growth stocks which at that point seemed infallible to just about everything, from global financial meltdowns to deadly pandemics. That doesn’t seem like a tough decision, does it?  Unlimited potential upside in bullet proof growth stocks or limited upside, unlimited downside, low yielding bonds… hmm.   So that was the end of it then, wasn’t it.  Well, not quite, as we learned in the past few months.  With the economic recovery beginning to become more clear and truckloads of fiscal stimulus en route, treasury yields began to rise, and suddenly I found myself writing about fixed income again and again.  Why? Not because investors were suddenly interested in buying bonds once again, but because growth stocks began to behave erratically.  In other words, they began to underperform.  “How could that be?” many wondered. It turns out that an obscure math equation used by analysts to justify stock prices relies on interest rates, and higher yields meant lower valuations.  This was particularly evident in growth stocks whose valuations are based more on future earnings than current.  That means, prices of growth stocks are more sensitive to moves in interest rates.  Suddenly, growth stock investors have become interested in interest rates, once again.  Ok, so regarding yields, they climbed roughly 3/4% year to date (10 year treasury).  Though many believe that the move is a response to potential Fed policy changes, the more likely justification is expectation for future growth and inflation.  What does the Fed think about all of this?  Well, you just need to refer to the minutes from its last FOMC meeting, released yesterday.  Fed Governors believe longer tenor treasury yields have risen in response to inflation expectations and not policy.  On policy, the minutes made it quite clear that raising interest rates is far, far in the future as is a tapering of QE bond purchases.  Regarding inflation, the minutes reflected the policy making body’s focus on current observations rather than forecasts.  In other words, they are not going to change policy preemptively, based on expectations.  That is somewhat benign, when it comes to worries over yields climbing.  Another thing to note is global yield discrepancies.  US treasuries are considered the least risky sovereign bonds, so you would expect that treasury yields would be lower than bonds issued by other countries.  That is however, in fact, not the case.  German Bunds are trading at -0.33% yield, UK Gilts yield 0.76%,  and Swiss bonds yield -0.33%.  Oh, remember those European countries that were struggling and bailed out a few years ago? Portuguese bonds are yielding 0.23%, Italian bonds yield 0.67%, and Greek bonds yield 0.82%. That is right, not only are all of those bonds yielding less than US notes, but some are even negative!  So if an investor is looking for a safe place for their money, it would seem that US 10-year treasury yields at 1.65% seem downright juicy… relatively speaking.  That said, there is likely to be increased demand for treasuries every time yields spike higher and that should be somewhat comforting news for bond holders.  Growth stock fans will also take some comfort in that as well.


Stocks traded mixed and slightly higher in yesterday’s session on no real news to latch onto.  The S&P500 climbed by +0.15%, the Dow Jones Industrial Average inched a gain of +0.05%, The Russel 2000 Index dropped by -1.60%, and the Nasdaq Composite slipped by -0.07%. Bonds fell and 10-year treasury yields rose by +2 basis points to 1.67%.


– Initial Jobless Claims (April 3) are expected to come in at 680k, down from last week’s surprising 719k.

– Chairman Jerome Powell will speak today.  Fed Presidents Bullard and Kashkari will also speak today.

– Conagra Brands beat earnings estimates this morning and we will hear from Constellation Brands before the bell.  Earnings season begins next week, so make sure to check in for details.


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