Yields on 10-year Treasury bonds declined. Why it could be good news for stocks

The benchmark yield on 10-year Treasury bonds fell to a one-month low on Thursday in a counterintuitive move that should be positive for the stock market.

Treasury yields, which are moving against price, had fallen, but gained momentum after two early morning economic reports on Thursday. One was retail sales in March, which rose nearly 10%, and the other was the weekly unemployment claim, which fell to 576,000 – the lowest level since the early days of the pandemic.

Strategists said the bond market was starting to peak for economic growth, which is expected to hit a whopping 10% this quarter. It also responded to news of possible Japanese purchases in Treasurys, as well as some concerns about Covid.

The 10-year interest rate fell to 1.53% and then fell back to 1.57%. One basis point is equal to 0.01 percentage point. The market is closely watching the 10-year Treasury as it affects mortgage rates and other consumer and business loans.

Thursday’s move in the bond market is the opposite of what normally could be the case.

Overall, very good news about the economy would have raised fears that the Federal Reserve would feel comfortable raising interest rates and that yields would remain at higher levels or continue to rise. Stocks rebounded on the reports as investors viewed them as good news.

Andy Brenner, head of International Fixed Income at National Alliance Securities, said there are a number of reasons for the drop in yields, but he sees it as temporary. “I will not change my view of higher revenues later this quarter,” he said. “This is good for stocks for now.”

Some strategists said the bond market may be entering a period where it trades in a range rather than hitting new highs or dropping sharply lower.

Government bond yields have been a source of volatility for equities this month. The abrupt run-up in the 10th year – from less than 1% at the end of 2020 to a high of 1.77% at the end of March – shocked the stock market. Investors feared interest rates would continue to rise and steal investment dollars from stocks.

Strategists said the drop amid strong data was seen as a sign that the market was now looking at those statistics in the rearview mirror.

Yields had risen higher than expected for a very strong second quarter and economy in general. Incentive spending and the amount of debt it took to pay for it also affected the increase in revenues.

“Number one: we meet high expectations for data … This was the way the market thinks about it. If it’s strong now, it will take over from the next. get stimulus spending, ”said Jim Caron, head of global macro strategies in the global fixed income team at Morgan Stanley Investment Management.

“The third quarter will be strong, but it will be weaker than the second quarter,” he said.

In terms of data, “the rate of change is starting to go the other way. You start to say well that around 1.7% [10-year yield] probably isn’t a bad place to grow tall, ”said Caron.

He said it could mean less volatility, which would be good for stocks and other assets.

“I think we can get into a range, as the Treasury market is notorious for doing that. It could be in a range of 20 basis points for months,” said Caron.

Brenner of National Alliance Securities said one of the reasons yields are declining is concerns about increasing Covid cases and the problem with the Johnson & Johnson vaccine slowing the path to herd immunity.

He said news of the vaccine, which was interrupted due to blood clots in six patients, could raise general concerns about vaccine safety, particularly among sections of the population who are already inclined to oppose it.

But Brenner said that’s just one factor. “I think you’ve been able to get the 10th anniversary below the 1.60% level and that accelerated it,” he said.

“Bonds are doing better because they see the economy as potentially slowing. Stocks are doing better because interest rates are falling and the economic data, looking back, is really good,” said Brenner.

He said hedge funds have also pushed interest rates down, after hedging shorts in the range of 1.70% to 1.75%. Another large area for shorts is 1,345%, Brenner added.

He said the 1.47% level should act as a floor, and strategists note that the 1.50% level is psychological support. But Brenner expects the decline in revenues to be short-lived.

“The Covid thing is going to be on the back burner and the vaccines will go for it. You had a window through which hedge funds could push the market,” Brenner said.

Ian Lyngen, head of US interest rate strategy at BMO, said another reason for buying Treasurys was prompted by a report from Japan’s Treasury Department.

“If you look at the [Ministry of Finance] Data, which came out overnight, shows that the week ending April 9, the Japanese bought more than $ 15 billion in foreign notes and bonds. The market assumes that the vast majority of that is allocated to US Treasuries, ”he said.

“This also happened at a time when the market was losing bearish,” said Lyngen. “We have stopped trading strong data towards higher interest rates. As a result, rates have simply gone down.”

Treasurys also passed another test this week, with a series of major auctions. The 10-year auction was Monday. “They bought $ 38 billion at 1.68%,” said Brenner. “You have a profit of 14.5 basis points.”