Reuters: NEW YORK The riskier parts of the market are trembling as a result of rising U.S. Treasury yields, and investors are unsure how much damage this will do to the surge that has boosted everything from equities to bitcoin this year.
Treasury yields this month reached their highest levels since 2007. Strong economic growth has fueled hopes that the Federal Reserve will maintain higher rates for a longer period of time. For owners of stocks and other speculative assets, which have rallied for the majority of the year despite yields moving steadily higher, this increase has made them tougher to ignore.
As the benchmark 10-year Treasury yield for the United States increased to a more than 15-year high of 4.35% on Monday, the S&P 500 has fallen 4% this month. Bitcoin has decreased by over 10%, the S&P 500 technology sector has lost 5.7%, and the ARK Innovation ETF, which has several high-growth companies, has lost 18.5%. On Monday, stocks generally rose, with the S&P 500 up 0.7% for the day.
Higher Treasury yields, which move opposite to bond prices, can dull the lustre of speculative assets by providing investors with alluring rewards on an investment that is perceived to be essentially risk free because it is backed by the U.S. government. Rising rates also raise the cost of capital across the economy, making debt servicing more challenging for everyone from people to businesses.
For investments like cryptocurrency and smaller cap growth firms that drained their resources, the day of reckoning is now, according to Sameer Samana, senior global markets analyst at the Wells Fargo Investment Institute.
Samana, who has unfavourable ratings on small caps, developing markets, REITS, and consumer discretionary companies, continued, “The biggest, clearest market theme for the next six months at least is to favour the parts of the market that are the least reliant on borrowing and credit.”
The annual meeting of central bankers in Jackson Hole, Wyoming, later in the week will serve as a critical test for the markets. On Friday, Jerome Powell, the chair of the Fed, will give a speech on the future of the economy.
Investors have begun to realise that “rates are not going to go back down as quickly as they thought,” according to Matt Maley, chief market strategist at Miller Tabak. They are revising their tactics as a result of it.
According to the most recent weekly statistics from Refinitiv Lipper, American investors were net sellers of equity funds for a third straight week in the seven days prior to August 16. They have invested almost $32.5 billion over the previous week, the largest influx since July 5, attracted by money market funds’ high rates.
Deutsche Bank’s index of investor stock positioning fell for the fourth week in a row, reaching a two-month low.
However, making bets against stocks this year has been a losing strategy. In a year where they have recovered from widespread recession fears and a banking sector upheaval, many investors are confident that stocks will continue to keep their value. Year to date, the S&P 500 is up 14.6%.
On Monday, Goldman Sachs strategists noted that institutional and retail investors’ equities holdings are below historical averages, suggesting that if the economy continues to grow, there may be more fuel available to sustain the bull market.
The recent fall in stock exposure, according to the firm’s strategists, “will be short-lived should the U.S. economy continue on its path to a soft landing,” they wrote.
According to Randy Frederick, managing director of trading and derivatives at the Schwab Centre for Financial Research, S&P 500 profits are expected to have reached a low point in the second quarter and will then increase in the third quarter, driving the index to a record high by year’s end. Over 8% of the S&P 500 is below its closing high from January 2022.
The days of low interest rates are ended, and new businesses carrying a lot of debt that must be refinanced at higher rates will struggle, according to Frederick. However, “we believe this is a brief lull for the market as a whole.”
(Editing by Ira Iosebashvili and Bill Berkrot; reporting by David Randall and Lewis Krauskopf)