Dow tumbled 559, decliners over advancers a huge 7-1 & NAZ plunged 478. The MLP index fell 3+ to the 158s & the REIT index dropped a very big 7+ to the 387s. Junk bond funds declined along with stocks & Treasuries were heavily sold, taking the yield on the 10 year Treasury up 11 basis points to 1.49% (not seen in more than a year). Oil edged higher in the 63s & gold sank 24 to 1773 (more on both below).
AMJ (Alerian MLP Index tracking fund)
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The 10-year Treasury yield briefly topped the 1.6% level today, hitting its highest level in more than a year. The yield on the benchmark 10-year Treasury note climbed was trading at 1.49%, up about 10 basis points on the session. The yield on the 30-year Treasury bond rose to 2.29%. Yields move inversely to prices. The 10-year traded as high as 1.614% during the session, which was the highest level since Feb 14, 2020. Some traders described the jump above 1.6% as a “flash move,” & yields quickly fell back to near 1.5%. The move higher in rates is unnerving investors fearing it could be driven by inflation rather than economic recovery. The 10-year yield ended Jan at 1.09% & closed 2020 well under 1%. So it's moved more than a ½ percentage point in under 2 months, quite rapid for the bond market and relative to rates at these historically low levels. The move marked the first time the 10-year has traded above 1.5% since Feb 21, 2020. Market-based measures continue to show signs of inflation pressures. Though consumer prices were up just 1.4% from a year ago in Jan, recent indicators of retail sales, durable goods purchases & service sector prices have shown inflation in the pipeline. The 5-year breakeven rate, an indicator of the bond market's expectations for inflation, rose to 2.38% yesterday, its highest level since before the financial crisis in 2008. Still, policymakers continue to downplay the possibility of troublesome inflation ahead as the US recovers from the Covid-19 pandemic. “We could have a surge in spending as the economy reopens. We don’t expect that to be a persistent longer-term force, so while you could see prices move up that’s a different thing from persistent high inflation, which we do not expect,” Federal Reserve Chair Jerome Powell said during a Senate committee hearing yesterday.
The 10-year Treasury yield jumps above 1.6% in a rapid move, unnerving investors
Gold futures tallied a 3rd straight decline as gov bond yields extended their climb to the highest level in a year, raising the opportunity cost of owning nonyielding gold over sovereign debt. A rise in bond yields, with the 10-year Treasury note advancing to above a psychological threshold at around 1.5%, has put pressure on stocks & gold, forcing investors to reassess the relative value of owning either asset against the backdrop of richer rates from risk-free Treasuries. Gold for Apr fell $22 (1.3%) to settle at $1775 an ounce, following losses in each of the past 2 sessions. Yesterday, prices marked the first finish below $1800 since Fri. 2 days of congressional testimony from Federal Reserve Chair Jerome Powell, as part of regular semiannual hearings helped to placate markets yesterday. Powell told the House Financial Services Committee that the Fed will maintain ultralow interest rates and continue hefty asset purchases until “substantial further progress has been made” toward its employment & inflation goals, echoing what he said on Tues in front of the Senate Banking Committee. Powell emphasized that the central bank's efforts to get the economy back to normal from the COVID-19 pandemic are “likely to take some time” to achieve. Progress on vaccination rollouts & boosters for virulent variants of the deadly disease are also helping to support a bullish outlook for the economy in H2, which adds to pressure on bond prices, which fall as yields rise. Data today showed that orders for durable goods—products meant to last at least 3 years — rose 3.4% in Jan, the biggest increase in 6 months. The US economy, meanwhile, expanded at an annual 4.1% pace in Q,4-2020 instead of 4%.
Gold marks third straight session decline as 10-year Treasury yields tap 1.5%
Concerns that the Federal Reserve could be repeating mistakes that led to an explosion of inflation in the late 1970s don't take into account that the central bank has a 2% inflation target, St Louis Fed Pres James Bullard said. Last week, former Treasury Secretary Larry Summers recently said the central bank is facing “inflationary pressures of a kind we have not seen in a generation” & is making a mistake for promising to keep interest rates low. “The Fed failed in the 1970s. And I think if the Fed wants not to fail, they are going to have to start recognizing the reality of those challenges and that is going to mean a significant change in their tone,” Summers said. The consumer price index rose over 13% in 1979. It has been a cautionary tale for the central bank ever since. Former Fed Chair Paul Volcker pushed interest rates almost up to 20% to bring inflation under control. Asked for comment, Bullard said that his view of the 1970s is that the Fed had little credibility & there was a debate over whether inflation was even the central bank’s responsibility. “That’s completely different from the inflation-targeting era that began in the 1990s and continues today,” Bullard said. In 2012, the Fed formally adopted a 2% longer-run inflation target. “So I have a hard time mapping anything that’s going on now back to what was happening in the 1970s,” Bullard added. Some economists are concerned that strong growth in money supply aggregates last year & early in 2021 could lead to higher inflation. Bullard said the theory that money aggregates lead to inflation also assumes such growth will continue. But under the Fed's 2% inflation target, the central bank is saying that it is going to act in such a way in the future that will keep inflation under control, he noted. Bullard said that all 3 leading theories economists use to forecast inflation trends — money growth, higher fiscal deficits & strong growth — are pointing higher. “No matter which of those three theories is your favorite as far as causes of inflation, all three are pointing to higher inflation in 2021,” he continued. But the Fed will be less preemptive to hike rates at the first “whiff” of inflation pressure, Bullard said. Inflation has been running at a 1.6% rate since 2012 so the Fed could miss on the “high side” by a ½-a-percent for some time & still achieve its 2% average inflation target, he said. Bullard said the recent rise in the 10-year Treasury yield “is appropriate” given the improving growth outlook & rising inflation expectations. He noted that the 10-year yield has not reached its pre-pandemic levels. Asked if the Fed would begin to slow down its bond-buying purchases this year, Bullard said it was too soon the speculate. “I gave a rosy outlook today… but I would definitely want to see whether this materializes or not before getting into any adjustments to policy,” Bullard said. “I just think we’re going to have to see the further progress before we even start that conversation,” he added. The Fed has said it will continue to purchase at least $120B of bonds & mortgage-backed securities each month until there has been “substantial progress” in meeting is goals of a healthy labor market & steady 2% inflation.
Fed’s Bullard dismisses concern of a repeat of the late-1970s inflation fiasco
Oil futures were mixed, with the US benchmark posting its highest close in nearly 22 months, while global benchmark Brent crude suffered its first loss in 4 sessions. Speculation that major oil producers next week will discuss a potential increase in production levels put pressure on Brent, after 3 straight days of gains lifted it to 13-month highs. Signs of a recovery in energy demand, following upbeat US economic data, as well tighter domestic oil supplies, provided some support for US oil. West Texas Intermediate crude for Apr rose 31¢ (0.5%) to settle at $63.53 a barrel. That was the highest front-month contract finish since May 1, 2019. During the session, prices had also spent time trading lower, touching a low of $62.65. The front-month Apr Brent crude, which expires tomorrow, lost 16¢ to $66.88 a barrel, while the most-active May Brent crude contract fell 7¢ to close at $66.11 a barrel. OPEC & its allies (OPEC+) will gather next week & are expected to make a decision on production quotas that would likely take effect in Apr. A report said OPEC+ may discuss a production increase of 500K barrels a day when the group meets. OPEC+ will hold a committee meeting on Mar 3, followed by the main decision-making gathering Mar 4.
Stocks traded lower as a rapid rise in Treasury yields spooked equity investors. With the longer term bull markets, yields were not getting much attention. But now they are & investors are worried about the future. The Dems will be pushing their almost $2T relief package tomorrow which should be the major driver for stocks.
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