Dow closes down over 1000 points as bond fears haunt stocks

Screen Shot 2018 02 05

A strong dollar policy has allowed the Fed to keep interest rates low for a prolonged period, argues Rebecca Patterson of Bessemer Trust. The bond yield/equity yield or BEER ratio at 1.85 makes equities look overvalued.

Benchmark 10-year notes last rose 5/32 in price to yield 2.8312 percent.

The S&P 500 Wednesday closed down a half percent at 2,681, after rising as much as 1.2 percent. Jobless claims are released Thursday morning at 8:30 a.m. ET, but there's no major data until CPI and retail sales data next Wednesday.

"The dust hasn't settled yet, and I think both buyers and sellers are trying to figure out what this market really wants to do", said Jonathan Corpina, senior managing partner for Meridian Equity Partners in NY. It's been pretty ugly.

Irrespective of short-term market movements, we believe that we are returning to a more "normal" cycle of higher yields and higher interest rates. Franzese says the big question everyone is asking themselves is whether this is a blip or there's something bigger at work: "A lot of people are sitting on cash and trying to decide what to do".

Thursday marked another day of sharp swings in recent sessions including the S&P 500's biggest drop in more than six years that pulled equities away from record highs. Germany's 10-year bond yield, the benchmark for the bloc, fell as low as 0.671 percent, down 7 basis points on the day and was set to close the day at 0.69 percent, still well below Monday's more-than-two-year high of 0.774 percent.

"You could get into a little bit of circular logic here, as you hand leadership back and forth".

"At this point a lot of it is about risk assets", said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in NY. The market's main gauge of volatility, the Cboe Volatility Index, rose 5.73 to 33.46 on Thursday, about three times the average level of the past year.

Still, after a long streak of record-breaking stock market gains, pessimism is growing.

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"I think there's going to be an interplay between equities and rates probably for the next several months, until we get greater clarity on how the overall growth outlook is going to be and if the Fed is thinking about shifting the reaction function", said Mark Cabana, head of USA short rates at Bank of America Merrill Lynch.

The deal is expected to add to the deficit. Even before the budget deal, the Treasury is ramping up new debt issuance to pay for tax cuts and entitlements. That only happened eight times all of past year, the fewest since 1964, according to LPL.

Still, this concept is usually in the background when people wonder about the staying power of a bull market, one that has gone for nearly nine years with nary a peep out of Treasuries.

"Global equity markets somewhat belated recognition of rising bond yields, along with fears that strong US jobs growth would prompt the US Federal Reserve to move more aggressively in rising rates, have combined to prompt the current market sell-off, in the absence of any fundamental factors that could derail the markets".

"We're in this interest rate bed all together". The ECB [European Central Bank] cut their quantitative easing in half.

Rory McPherson, head of investment strategy at Psgima IM, said investors should expect more volatile markets heading into 2018, as this is the first year where the marginal buyer of bonds is not a central bank.

World share markets fell on Friday, with USA equity indexes swinging between positive and negative territory, a day after a plunge that confirmed a correction for the market, while benchmark Treasury yields were set to close the week little changed.

"When longer-term interest rates rise, that tends to stem inflation and economic growth, and that feeds back into corporate profits".

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