The Danger of Rising Bond Yields, and the Opportunities

Author: , Post Date: October 10, 2018


The Danger of Rising Bond Yields, and the Opportunities

Excerpt below:

The 10-year Treasury note was yielding 3.24% in midafternoon trading on Wednesday, just below the seven-year high reached Monday, when the 10-year Treasury yield hit 3.25%, buoyed by Friday’s unemployment report showing the jobless rate at its lowest level in 49 years. By day’s end the 10-year Treasury yield had retreated to 3.19%, below the 3.21% close on Tuesday, but the major U.S. stock market indexes were off more than 3% from the previous close.

Traders cited rising Treasury yields, escalating U.S. trade war with China and a recent IMF warning on global growth, including U.S. growth, for the decline, which was led by large-cap tech stocks like Apple and Google.

“Markets are repricing risks,” says David Kotok, chief investment officer at Cumberland Advisors. “Bottom line, rates have to go higher to really zonk markets, but markets are now starting to realize that there is an upward trend in interest rates, that there there is some rising, accelerating inflation, and that the Fed is being placed between a rock and a hard place by Trump because they have to contend with the growing effects of the Trump-Navarro trade war.” Peter Navarro is one of the top trade advisors in the administration.

Kotok notes that investors can now collect 5% yield on federally guaranteed mortgage-backed securities, 4%-plus yield on very high grade tax-free bonds, and 2% on cash equivalents. And with expectations that yields may go even higher, based in part on the Fed signaling more rate hikes this year and next, some bond buyers are stepping to the sidelines while other bondholders and stockholders “don’t need a lot of encouragement to sell on the heels of huge bull markets in both for many years.”

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