This week, a bond selloff took hold led by U.S. Treasuries, raising yields across the globe. In the course of 4 days at the beginning of October, the yield on the U.S. 10-year note rose 14 basis points (bps) and the yield on the U.S. 30-year Treasury bond rose 11 bps. This almost matched the move higher in yields that took place the entire month of September, which was 15 bps and 12 bps respectively. The Dow Jones Industrial Average (DJIA), the S&P 500, and NASDAQ held in fine the first couple of days but yesterday, a fair bit of re-pricing took place. The DJIA finished the day -0.75%, the S&P -0.82% and the NASDAQ -1.81% (the tech-heavy NASDAQ fell more due to a story about “spy chips” being inserted into devices by Chinese manufacturers as well as the move in yields). The markets may have reacted negatively to the rise in yields, but the aggressive selloff was more a reaction to the speed of the move than the actual change in rates. Had the rising yields happened in a more orderly fashion, the market may have focused more on the good news; the steepening yield curve.
Recession Risk Falls
For months we’ve heard that stocks should be lower due to the imminent risk of a recession being foretold by the flattening yield curve. This may have been true, but the fact now is the yield curve is headed back in the right direction to stave off that risk. On August 1st, the 10-year yield minus the 2-year yield curve spread (2’s-10’s) was at 33 bps and the 30-year yield minus the 2-year yield curve spread (2’s-30’s) was at 46 bps. By September 3rd they had flattened to 24 and 41 respectively. September 28th, the 2’s-10’s was still 24 but the 2’s-30’s had flattened another 3 bps to 38. Here’s the good news; by mid-day yesterday, the 2’s-10’s were back at 34 bps and the 2’s-30’s were back to 45 bps. Once the Dow, the S&P and the NASDAQ get used to the new overall levels of rates, the steepening yield curve will be the silver lining of higher bond yields.