Rate Hike Rumble: Bond Yields Shake Markets
Stocks continued their recent selloff on Tuesday amid concerning developments. Labor market data revealed an unexpected jump in job openings in August, while an intensifying labor strike in the auto sector and surging oil prices added to investor worries.
Yet, beneath this turmoil, market experts are pointing to the pivotal role of the bond market, with concerns rising that a robust economy could lead to more interest rate hikes by the Federal Reserve.
The yield on 10-year Treasury notes touched 4.8%, the highest since 2007, causing investors to rethink their strategies. Higher interest rates make “safer” investments like money market funds more attractive. This shift towards safety gained momentum as investors grappled with the prospect of “higher for longer” interest rates, as emphasized by Fed Chair Jerome Powell.
The Fed’s Summary of Economic Projections showed expectations for lower rates in 2024 and 2025 but still anticipated higher rates by the end of 2026. This led to a decline in the S&P 500, while yields on 10- and 30-year Treasuries surged, reshaping investor perceptions of fixed income.
Investors are demanding higher yields to compensate for the risk of longer-term fixed-income investments. The swift rise in yields, characterized as “violent” by some experts, has rattled markets due to its speed more than the actual rate level.
The Bank of America’s equity strategy team believes the S&P 500 could reach 4,600 by year-end, partly driven by the “Magnificent Seven” tech stocks. They also see potential in the equally-weighted S&P 500 index.
To reduce volatility, economic data may play a role. Positive economic news has led to stock market declines, as it raises the possibility of further rate hikes by the Fed. Weak economic data, like a disappointing jobs report, could provide some relief.
The September jobs report is expected to show 170,000 jobs added and a slight dip in the unemployment rate to 3.7%. However, even if it aligns with expectations, it may not stabilize markets. Cleveland Fed President Loretta Mester suggested that the Fed could advocate for another rate increase if the economic landscape remains similar to recent meetings.