Market Euphoria May Turn to Despair If 10-Year Yield Jumps to 3%

Market Euphoria May Turn to Despair If 10-Year Yield Jumps to 3%

By Liz McCormick  and Daniel Flatley
January 30, 2018, 7:00 AM GMT+8

It’s getting harder and harder to quarantine the selloff in Treasuries from equities and corporate bonds.

The benchmark 10-year U.S. yield cracked 2.7 percent on Monday, rising to a point many forecasters weren’t expecting until the final months of 2018. For over a year, range-bound Treasuries helped keep financial markets in a Goldilocks state, with interest rates slowly rising due to favorable forces like stronger global growth and the Federal Reserve spearheading a gradual move away from crisis-era monetary policy.

Yet the start of 2018 caught many investors off guard, with the 10-year yield on pace for its steepest monthly increase since November 2016. Suddenly, they’re confronted with thinking about what yield level could end the good times seen since the presidential election. For many, 3 percent is the breaking point at which corporate financing costs would get too expensive, the equity market would lose its luster and growth momentum would fade.

More details in https://www.bloomberg.com/news/articles/...jumps-to-3

(30-01-2018, 12:55 PM)cyclone Wrote: Market Euphoria May Turn to Despair If 10-Year Yield Jumps to 3%

By Liz McCormick  and Daniel Flatley
January 30, 2018, 7:00 AM GMT+8

It’s getting harder and harder to quarantine the selloff in Treasuries from equities and corporate bonds.

The benchmark 10-year U.S. yield cracked 2.7 percent on Monday, rising to a point many forecasters weren’t expecting until the final months of 2018. For over a year, range-bound Treasuries helped keep financial markets in a Goldilocks state, with interest rates slowly rising due to favorable forces like stronger global growth and the Federal Reserve spearheading a gradual move away from crisis-era monetary policy.

Yet the start of 2018 caught many investors off guard, with the 10-year yield on pace for its steepest monthly increase since November 2016. Suddenly, they’re confronted with thinking about what yield level could end the good times seen since the presidential election. For many, 3 percent is the breaking point at which corporate financing costs would get too expensive, the equity market would lose its luster and growth momentum would fade.

More details in https://www.bloomberg.com/news/articles/...jumps-to-3

Not the only warning about rising interest rates:

https://www.theedgesingapore.com/why-we-...rest-rates

market direction will probably depend on what Yellen says at her last fed meeting. But it has been a sudden jump in yields from 2.4 to now 2.7 %+ level. If head to 3% it will probably start a self reinforcing spiral which FED will need to step in to halt. Many seem to forget that the FED not only increase interest rates, it has also started paring down the balance sheet (4.6 trillion dun play play)last quarter. Such a big double move is sure to suck a lot of liquidity from the system. US 10yr yields have already up from 2% lows last september when FED announced the paring down of balance sheet.

IMHO the US and global economy is not strong enough to withstand the withdrawal of FED stimulus. Hopeful for a dip in February

The dip in February is now an official 'correction', at least on the Dow Jones:

https://www.theguardian.com/business/liv...n-business

Presume Asian markets, including Singapore, will knee-jerk react today.

Several threads on Valuebuddies flagged up the issue of the rising interest rates that have spooked markets, and did so while markets were still euphoric.

There appears to be a concern that the unwinding of large plays on low volatility may cause further falls (and volatility) in the markets in the near term. Longer term (months and years), there is the reversal of QE, normalisation of interest rates and prospect for inflation, and the effect these factors will have on super-heated asset markets.

Looking forward to finding real value stocks again, which has been difficult over the last year. No idea how long or how far the current fall will continue, so will just react when I see value.

(09-02-2018, 07:27 AM)Dosser Wrote: The dip in February is now an official 'correction', at least on the Dow Jones:

https://www.theguardian.com/business/liv...n-business

Presume Asian markets, including Singapore, will knee-jerk react today.

Several threads on Valuebuddies flagged up the issue of the rising interest rates that have spooked markets, and did so while markets were still euphoric.

There appears to be a concern that the unwinding of large plays on low volatility may cause further falls (and volatility) in the markets in the near term. Longer term (months and years), there is the reversal of QE, normalisation of interest rates and prospect for inflation, and the effect these factors will have on super-heated asset markets.

Looking forward to finding real value stocks again, which has been difficult over the last year. No idea how long or how far the current fall will continue, so will just react when I see value.

Sharing similar sentiments here. Will definitely start buying once STI index actually goes back down to 3100 levels which will be about a 10% drop from 3500 levels. 

There have been few value stocks left recently but most not even trading near their lows and certainly none left which are in sectors doing well like manufacturing, so a correction is certainly welcome.

Gonna be mayhem on STI today, should see some broad based sell down. Lol maybe its the contagion effect from crypto crash.

2008 crisis 10 year yield is 5.6%,
Now the rates are nearly half of what it used to be.

I'm still bullish.

Bitcoin is back up at US$10k, stocks are back up, yield is at 4 year high at 2.91%. Music keeps playing.

Actually I don't think the market correction is solely yield driven. The rate and magnitude of the fall felt more algorithm driven (a la 1987, which was largely driven by the poor implementation of automatic stop-loss).

(15-02-2018, 05:09 PM)Terry Wrote: 2008 crisis 10 year yield is 5.6%,
Now the rates are nearly half of what it used to be.

I'm still bullish.

I would just like to caution that the starting base is different and thus the multiplier effect/impact is magnified. Thus, this assumption could be invalid.

As a good gauge, one must understand during the previous cycle, interest rates started from a low of 1% and gradually rose to 5.25%.

During this year, interest rates started from a low of 0.125% and has now crept up to 1.42%. Where will it end is anybody's guess

The yield got to 2.9% on 14th February, with markets recovering from last week's sell off.

This amusing article in the SCMP suggests maybe 4% yield on the 10-year bond in a year's time, and a possible market collapse next year, quote 'a 50% collapse would be kind':

https://sc.mp/2o9olpW

Still, only a newspaper pundit. It is easy to dash off an alarming article. I wonder if he is putting his money where his mouth is?

It does, however, look likely that this year will be volatile, with greed and current liquidity battling fear of rising interest rates and withdrawal of liquidity. We should be able to get back to picking out promising/neglected value stocks, and not worrying too much about market gyrations. A collapse sooner, rather than later, would help, as a general fall tends to take down the good as well as the bad, and throws up real bargains.