A surge in Treasury yields and fears of a federal government shutdown weighed on Wall Street on Tuesday, sending the STANDARD & Poor’s to its biggest one-day drop since May and below its 50-day moving average of 4,443 for the second time in the past seven sessions.
Currently, the S&P 500 is not far from its 100-day moving average of 4342. As of Tuesday, half of the stocks in the S&P 500 had fallen more than 10% from their 52-week highs, entering correction territory. More than 60 of them are down more than 20% from their highs.
With just one trading day left in September, the S&P 500 is down 3.6% so far this month, making it the index’s weakest month since September 2020. In September 2020, when the index was down 3.9%.
Here are 10 stocks that rose at least 50% in 2021 through Sept. 27, but had the biggest pullbacks on Sept. 28.
Market analysis attributed the sell-off to a sharp rise in U.S. bond yields, rising concerns about inflation, and disagreement over the debt ceiling. Treasuries sold off for a fourth straight day on Tuesday, with the yield on the 10-year note hitting its highest level since mid-June.
Why have Treasury yields been rising recently? Cicc research believes that it is mainly an expected revision of the Fed’s tapering approach. The signals from the September FOMC meeting were all on the hawkish side, giving a strong signal. If everything goes well, the cuts are likely to start at the November meeting.
Cicc said that historical experience shows that long-end US bond rates tend to precede in the expectation stage, but instead peak and fall when monetary policy is actually implemented. Therefore, the recent performance is also consistent with the historical pattern of interest rate changes around the 2013 tapering and previous multiple rate hikes.
First, how will the US bond yield affect the US stock market?
The recent spike in 10-year Treasury yields has caused concern. The rise in 10-year Treasury yields is generally seen as a negative for equities, mainly in the form of revaluation.
But in the short term, sharp spikes in BOND yields have often been followed by large pullbacks in STOCKS. But in the medium to long term, U.S. stocks will rise more than fall when U.S. bond yields rise.
Gf Securities Research Notes that recorded valuation changes in major US stock indices over the past 20 years have shown a weak positive correlation with changes in us 10-year Treasury yields. That is to say, judging from historical experience, after the 1990s, short-term non-sustainable US bond yields rose, which had a positive impact on the stock index.
Guosheng Securities also believes that the “valuation killing” effect caused by the rapid rise in US bond yields is mainly concentrated during the Federal Reserve tightening monetary policy; In the easing cycle of monetary policy, the upward trend of US Treasury yield is often accompanied by the synchronous upward trend of US stock PE, which reflects the improvement of earnings expectations.
Here are nine of the biggest increases in Treasury yields since 1953, along with monthly gains and losses for the three major U.S. stock indexes.
According to data calculations, the three major U.S. stock indexes rose in eight of the nine periods when the 10-year Treasury yield rose, and fell in only one period, falling between 8.44% and 20.56%.
Second, what is the pace of interest rates?
What happens next for treasuries, the anchor of global asset pricing, will no doubt have great implications for financial markets as a whole.
Cicc believes that the FOMC meeting to be held in early November is still the most important variable affecting the near-term interest rate trend. If there is no accident, before then, the overall interest rate will still maintain the upward trend until the official reduction cash, this part of the expectation will also be basically included, then the interest rate may gradually build the top.
According to CICC’s model, the 10-year equilibrium level of US Treasuries is around 1.8%, while real interest rates may imply 90-100bp of upside.
The rise in Treasury yields since last week’s FOMC meeting “has brought the mortgage sector close to the peak of negative convexity”, Morgan Stanley MBS strategists wrote. The bank expects 10-year yields to rise to 1.8 per cent by the end of the year.
As of Monday, 25 percent of clients had a net short position in Treasurys, up from 20 percent the previous week, according to the latest Morgan Stanley survey.
In a Bloomberg survey of primary dealers earlier this month, the 10-year yield is expected to rise to 1.69 percent by year-end, nearly 15 basis points higher than current levels, according to the average forecast.
Andrew Pease, head of global investment strategy at Russell Investments, said in an interview that the market is reassessing the outlook for monetary policy going forward and that yields have more room to move higher. He believes longer-term yields are in the process of re-normalizing.
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