Bonds are heading towards their third consecutive year of losses in what some analysts are calling the worst bear market in history. But optimism this week that inflation is coming under control could be enough to turn things around.
What's happening: US bond yields, which move in the opposite direction of bond prices, tumbled on Tuesday after new inflation numbers came in lower than expected.
The New York Federal Reserve's latest Survey of Consumer Expectations on Monday also showed that consumers project lower inflation a year from now than they did in September.
The 10-year US Treasury yield fell nearly 0.2 percentage points to 4.44% and the 2-year US Treasury yield dropped about the same to 4.8% as investors' expectations grew that the Fed is finally done hiking interest rates.
Stocks, which often take cues from the bond market, also had a strong day: The Dow closed nearly 500 points higher, up about 1.4%, and the S&P 500 gained more than 1.9%.
And while it's possible that Tuesday's gains are just a data-driven blip, investors think that a sea change is coming. They have never been more confident that bonds will move higher and yields will move lower in 2024, according to the latest Bank of America fund manager survey.
"The big change in [November's survey] was not the macro outlook," wrote BofA's data analytics team led by Michael Hartnett on Tuesday. "But rather the conviction in lower inflation, rates, and yields."
If that conviction remains steady and Treasury yields continue their descent, stocks will likely continue to rise. That's because lower bond yields increase investors' willingness to invest in stocks and other risky assets by loosening financial conditions and lowering the cost of credit for companies.
"We need to see more months with soft inflation data, but the stock and bond market is celebrating today," said Gina Bolvin, president of Bolvin Wealth Management Group. "We're set up nicely for a year-end rally."
Why it matters: For American consumers, an easing 10-year Treasury return means less economic pain: cheaper car loans, lower credit card rates and even less-expensive student debt.
It also means that the cost of mortgages will likely ease. Mortgage rates tend to track the yield on 10-year US Treasuries. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.
The average rate on the 30-year mortgage also unofficially fell by nearly 0.2 percentage points on Tuesday to 7.40%, according to Mortgage News Daily, as Wall Street adjusted its rate hike expectations.
Surging mortgage rates over the past few years have sent home loan applications and home sales down sharply. Sales hit a 13-year low in September. But recent dips in those rates last week led to a 2.5% increase in all applications for loans from the previous week, according to the Mortgage Bankers Association. Applications for a mortgage to purchase a home went up by 3%.
Big shifts: Less than a month ago, 10-year US Treasury yields were flirting with 5% for the first time since 2007, before the global financial crisis. The 30-year fixed rate mortgage was also advancing towards 8% — a level not seen since the dot-com bubble popped in 2000.
Those raging Treasury yields brought pain to investors and also increased how much American companies had to pay to service their debts. There's about $3 trillion in corporate debt that will require refinancing within the next five years, which means "distress risk is real," said Phillip Wool, an analyst with Rayliant, an investment strategy firm.
But that pain seems to be in the rear view mirror for investors who think that the Fed is finished raising rates and that a soft landing for the economy lies ahead. Financial markets currently see a 100% chance the Fed will either continue to pause rate increases or lower rates at its December policy meeting, according to the CME FedWatch Tool. That's up from 93% on Wednesday.
Comments
Post a Comment