The threat to stocks is called bonds

Wall Street bowed by sales due to the threat posed by bonds: it happened again yesterday, as demonstrated by the third consecutive session of declines for US stocks, triggered by new sales on Treasuries: sales that caused ten-year yields to jump up to 4.26% in the intraday highs of yesterday’s session.

Having thus broken through the danger threshold of 4.25%, warned Mark Malek, head of investments at Siebert, who identified precisely this level as a resistance whose overcoming could cause yields to fly up to 4.5%, to the detriment of stocks.

Already yesterday, the upward march of Treasury yields caused a sharp retreat in US stocks, with the Dow Jones closing its worst session since early September, suffering a loss of more than 400 points (-0.96%), which brought it down to 42,514.95 points and the S&P 500 retreating by 0.92%, to 5,797.42 points. Both indices marked a decline for the third consecutive session. The Nasdaq Composite also did badly, slipping by 1.60%, to 18,276.65 points. What will happen at this point now?

It is undeniable that the new surge in Treasury yields has contributed to putting pressure on Wall Street in recent sessions: a surge that occurred in the wake of the great doubt on the direction of US fed funds rates, and therefore on what the Fed’s next monetary policy moves will be, which has fallen back on the markets.

The maxi rate cut of 50 basis points launched by the American central bank last September 18, analysts and investors are wondering, has it given rise to a strong easing of restrictive monetary policy in the United States or is it destined to be confirmed as an exception to the institution’s next moves?

The question is haunting traders, who are no longer convinced of the advent of new ultra dovish announcements on rates by the Fed led by Jerome Powell.

The great doubt was also supported by the minutes of the minutes of that last meeting of the FOMC, the monetary policy arm of the Fed, which showed that the debate among the central bank officials on whether to proceed with a rate cut of 25 basis points or 50 basis points was quite heated.

And, although the final verdict was reached almost unanimously (Fed Governor Michelle Bowman was the only one to remain firm on the need to proceed with an initial rate cut of 25 basis points), the minutes confirmed that a reduction of 25 basis points “would be in line with the path of a gradual normalization of rates, which would give the officials (of the Fed) time to evaluate the degree of monetary restriction, in the light of developments in the economy”.

It is therefore not absurd that with an economy that remains solid and that is certainly not crying out for help to be saved and with inflation ready to raise its head at any moment, in the wake of the escalation of geopolitical tensions, the Fed decides to be more cautious in cutting rates or, who knows, maybe even inclined to apply the brakes.

Will bonds continue to sink stocks?

This is how Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management, commented on the about-face of stocks, according to CNBC: "In my opinion, it all depends on the impact of higher interest rates. The market is pricing in the likelihood that the Fed will cut rates aggressively".

Paul Hickey, co-founder of Bespoke Investing Group urged investors not to panic, however: “It was a bad day, but that happens,” he told CNBC, commenting on yesterday’s session.

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Wells Fargo’s research arm also remains bullish on Wall Street, believing that stocks could rally in 2025, despite short-term uncertainty.

Also keep an eye on the comment of the head of technical analysis at Piper Sandler, according to whom, if it is true that several obstacles could slow down the stock market’s run before the end of 2024, in 2025 the S&P 500 could rise, even reaching the threshold of 6,600 points, a level 13.8% higher than the closing level of yesterday’s session, Wednesday 23 October 2024.

That said, anxiety about the trend of Treasuries remains, if we consider that, at yesterday’s intraday highs, 10-year yields have soared up to 4.26%, the highest value since last July 26:

A trend that has extended the leap already achieved on Monday, when yields had flown by 12 basis points, to then break through the threshold of 4.2% in the session of Tuesday 22 October, pricing in not only the arrival of macro data that confirmed the solidity of the economic fundamentals of the United States but also fears of a further surge in the US federal deficit.

And so, even if it was the Fed itself that spoke explicitly of the possibility that, by the end of the year, further rate cuts of 50 basis points could arrive, traders have toned down their bets on other imminent jumbo-cuts, after the one in September.

It should be noted that, from the dot plot published in the September meeting, it emerged that the 19 members of the FOMC, both voters and non-voters, estimate rates on fed funds to fall to 4.4% by the end of this year, or to a range between 4.25% and 4.5%.

There are only two Fed meetings left before the end of the year, scheduled for November 6-7 and December 17-18.

For the whole of 2025, the forecasts engraved in the dot plot are for rates down to 3.4%, therefore for another overall cut of 1 percentage point, while for 2026, the outlook is for a target at 2.9%, down 50 basis points overall.

Also pay attention to the trend of 2-year Treasury yields, which yesterday rose to 4.072%, the highest since October 10.

The forecast that scares. Also, beware of the US federal deficit effect

What is certainly scaring the stock market is the forecast made by Arif Husain, head of investments in the fixed income division of T Rowe Price, who manages assets for a value of approximately $180 billion of the company, and who estimates a jump in the yields of 10-year Treasuries up to the threshold of 5% over the next six months, in the face of "a steepening of the yield curve".

Among the reasons that would return to inflame the yields of US government bonds, according to the expert, the continued issuance of Treasuries by the US Treasury, to finance the federal deficit: an issuance that should "flood the market" with the arrival of a new supply. According to Husain, the upward trajectory of yields is also because the Federal Reserve, with its QT-Quantitative Tightening , plan that it is continuing to push forward, is no longer practically shielding demand for US government debt.

Meanwhile, bets on a new 50 basis point rate cut by the Fed are becoming increasingly rarer on the markets: the CME FedWatch of October 21 showed that the markets are betting on a 25 basis point cut that will bring rates down to the new range between 4.5% and 4.75% at the next Fed meeting in November with a probability of 99.4%: a certainty, in short. A signal that Wall Street continues to interpret as a warning about placing too much faith in the real willingness of the American central bank to cut rates significantly.

Original article published on Money.it Italy 2024-10-24 11:13:52. Original title: La minaccia per le azioni si chiama bond