The 10-year Treasury yield fell. Why it might be good news for stocks

The 10-year Treasury benchmark yield fell to a one-month low on Thursday, in a counterintuitive move that should be positive for the stock market.

Treasury yields, which are moving against the price, had fallen, but picked up momentum after two economic reports on Thursday morning. One was retail sales in March, which jumped nearly 10%, and the other, weekly unemployment claims, which fell to 576,000, the lowest level since the early days of the pandemic.

Strategists said the bond market was starting to trade at a peak in economic growth, which is expected to reach 10% this quarter. He also responded to news about possible Japanese purchases from Treasurys, as well as some concerns about Covid.

The ten-year yield fell to 1.53%, before returning to 1.57%. One basis point equals 0.01 percentage points. The market is closely watching the ten-year Treasury because it influences mortgage rates and other consumer and business loans.

Thursday’s move into the bond market is the opposite of what could normally be the case.

Overall, very good news about the economy would have sparked fears that the Federal Reserve would be comfortable raising interest rates and that yields would stay at higher levels or rise further. Shares rose in the reports as investors took them as good news.

Andy Brenner, head of international fixed income at National Alliance Securities, said there are several reasons why the decline in yields is low, but he considers it temporary. “I won’t change my view of higher yields at the end of the quarter,” he said. “That’s good for stocks for now.”

Some strategists said the bond market could be moving to a period where it is trading in a range instead of moving to new highs or falling sharply.

Treasury yields had been a source of volatility for stocks earlier this month. The steep stage expected in the ten years – from less than 1% at the end of 2020 to a maximum of 1.77% at the end of March – shook the stock market. Investors feared that interest rates would continue to rise, stealing investment dollars from stocks.

Strategists said the lower move amid solid data was seen as a signal that the market was now looking at these statistics in the rearview mirror.

Yields had been rising in anticipation of a very strong second quarter and the economy as a whole. Spending on incentives and the amount of debt needed to pay it also influenced the rise in yields.

“First, we are relying on high data expectations … This is how the market thinks about it. If it is strong now, it will take from the next. In the second quarter, we will get maximum data and get the maximum fiscal stimulus spending.” , said Jim Caron, head of global macro strategies for Morgan Stanley Investment Management’s global fixed income team.

“The third quarter will be strong, but it will be weaker than the second quarter,” he said.

In terms of data, “the exchange rate is starting to go upside down. You’re starting to say well around 1.7% [10-year yield] it’s probably not a bad place to stretch, ”Caron said.

He said it could mean less volatility and that it would be good for stocks and other assets.

“I think we can get into a range because the Treasury market is famous for doing that. It can be in a range of 20 basis points for months,” Caron said.

Brenner of National Alliance Securities said one of the reasons yields are falling is concern over rising Covid cases and problems with the Johnson & Johnson vaccine slowing the way to the U.S. immunity. ramat.

He said news of the vaccine, halted for blood clots in six patients, could raise general concerns about vaccine safety, especially among parts of the population that are already inclined to oppose it. .

But Brenner said that’s just one factor. “I think he was able to get the ten years below the 1.60% level and that caused an acceleration,” he said.

“Bonds are improving because they see that the economy can slow down. Stocks are improving because interest rates are going down and economic figures, which have a look back, are really good,” Brenner said.

He said hedge funds have also been pushing yields down, after covering short films from 1.70% to 1.75%. Another large area of ​​shorts is 1.345%, Brenner added.

He said the 1.47% level should act as a ground and strategists point out that the 1.50% level is psychological support. But Brenner expects the period of lower yields to be short-lived.

“Covid’s things will catch fire and vaccines will pass by. You had a window that allowed hedge funds to propel the market,” Brenner said.

Ian Lyngen, head of U.S. tariff strategy at BMO, said another reason for buying games from Treasurys was motivated by a report from Japan’s Ministry of Finance.

“If you look at it [Ministry of Finance] the data, which came out overnight, we see that in the week ending April 9 the Japanese bought more than $ 15 billion in bonds and bonds abroad. The market assumes that the vast majority of this has been allocated to American treasures, ”he said.

“This also happened at a time when the market was losing quite bearish strength,” Lyngen said. “We stopped trading strong data towards higher rates. This has allowed rates to simply go down.”

Treasurys also passed another test this week, with a series of big auctions. The ten-year auction was on Monday. “They bought $ 38 billion at 1.68%,” Brenner said. “You have a profit of 14.5 basis points.”