Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Stock Market Rescued by the Fed Again? - 24th Sep 21
Are Amazon Best Cheap Memory Foam Mattresses Any good? Bedzonline £69 4ft Small Double ECO Example - 24th Sep 21
Evergrande not a Minsky Moment - 24th Sep 21
UK Energy Firms Scamming Customers Out of Their Best Fixed Rate Gas Tariffs - 23rd Sep 21
Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Should School Children be Jabbed with Pfizer Covid-19 Vaccine To Foster Herd Immunity? - UK - 23rd Sep 21
HOW TO SAVE MONEY ON CAR INSURANCE - 23rd Sep 21
Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
Trading Crude Oil ETFs in Foreign Currencies: What to Focus On - 22nd Sep 21
URGENT - Crypto-trader event - 'Bitcoin... back to $65,000?' - 22nd Sep 21
Stock Market Time to Buy the Dip? - 22nd Sep 21
US Dollar Bears Are Fresh Out of Honey Pots - 22nd Sep 21
MetaTrader 5 Features Every Trader Should Know - 22nd Sep 21
Evergrande China's Lehman's Moment, Tip of the Ice Berg in Financial Crisis 2.0 - 21st Sep 21
The Fed Is Playing The Biggest Game Of Chicken In History - 21st Sep 21
Focus on Stock Market Short-term Cycle - 21st Sep 21
Lands End Cornwall In VR360 - UK Holidays, Staycations - 21st Sep 21
Stock Market FOMO Hits September CRASH Brick Wall - Dow Trend Forecast 2021 Review - 20th Sep 21
Two Huge, Overlooked Drains on Global Silver Supplies - 20th Sep 21
Gold gets hammered but Copper fails to seize the moment - 20th Sep 21
New arms race and nuclear risks could spell End to the Asian Century - 20th Sep 21
Stock Market FOMO Hits September Brick Wall - Dow Trend Forecast 2021 Review - 19th Sep 21
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Market Sour Surprise

Stock-Markets / Stock Markets 2014 May 22, 2014 - 01:05 PM GMT

By: Money_Morning

Stock-Markets

Shah Gilani writes: On Monday, I explained why, when you’re considering investment ideas, you should always keep the bond market in mind. That’s because stocks and bonds are inextricably interconnected.

They’re inextricably interconnected because interest rates matter.

When expected relationships between stocks and bonds (interest rates) diverge, therefore, it’s important to take notice, try to understand what is happening, and consider what the divergences could portend for both stocks and bonds.


Markets are experiencing a divergence now, and a lot of analysts are getting worried.

Stocks have been moving higher as the yield on the 10-year U.S. Treasury note has been falling (“bills” have a maturity of one year or less, “notes” go up to 10 years, and “bonds” have maturities of more than 10 years).

The 10-year Treasury note is now the “benchmark” interest rate that’s widely watched and viewed as a proxy for the general direction of interest rates. It’s currently yielding 2.53%. That means you give the Treasury your cash, and it gives you a note that pays you 2.53% annually for 10 years, and then you get your principal back.

When the Federal Reserve, which has been manipulating interest rates down to historic lows, said it was going to begin “tapering” its massive purchases of Treasury bills, notes and bonds, and mortgage-backed securities, the bond market got nervous. The Fed had managed rates down by exercising its quantitative easing (QE) program and announced it was paring back QE purchases because it saw the economy picking up.

(In its QE program, the Fed buys bonds from banks to flood those banks with cash in the hope that all that cash would trickle down into the economy.)

The yield on the 10-year note moved from about 2.25% to 3% in short order.

The thinking goes that if the economy is picking up it doesn’t need the Federal Reserve to keep a lid on rates. That’s because accelerating growth will increase demand for money and loans, which puts upward pressure on interest rates.

And letting the economy stand on its own two feet and letting interest rates rise modestly wouldn’t be bad for the economy, right?

Further, if interest rates rise gently, investors and businesses will take that as a sign that the economy is indeed picking up, and that will be reflected in the demand for loans and money, which ultimately shows up in rising interest rates. So, if rates are rising, things are getting better.

However, things don’t look like they’re working out that way. And now I’m going to tell you what actually happened and what this means – maybe – for your portfolio.

Sour Surprise

At the first mention of tapering, the stock market turned sour. If the Fed was cutting back its QE buying and was going to let rates rise gently, a few considerations came to light.

First, the stock market has risen because interest rates have been artificially low. Cheap money, which allows investors and speculators to borrow at low rates to leverage up their positions, moves stocks higher, because more shares can be bought.

And when interest rates are inordinately low, stocks become a more viable investment alternative, on account of cheap money coming in to buy shares and because dividend yields on a lot of stocks pay considerably more than bills, notes, and bonds. Their yields are being held down.

With the beginning of the end of the Fed’s interest-rate manipulation on the horizon, stocks sold off. After all, if the economy was getting better, rates were going to rise, and stocks were at all-time highs, how much further might they go if the boost they had gotten for years was being tapered back?

Then the divergence showed up.

The 10-year yield began to fall while stocks regained ground and made another run higher.

As far as divergences go, and there are many relationships that sometimes diverge, this one grabbed a lot of attention.

Why was the yield on the 10-year going down and not up if the Fed was tapering, if the economy was getting better? And why were stocks going up?

Here’s what’s worrisome.

The 10-year yield goes down because investors are buying the notes. Why are investors rushing into government notes and bonds?

One theory is that there’s a “flight to quality” going on. Big institutional investors are nervous because they think there’s something wrong somewhere and they want to get into the safest trades.

Maybe there are macro fears, like fear that Russia will start a war, or that Iran will stir up trouble, or Syria will implode further, or Thailand will foster regional nervousness. Any number of worrisome global macro events might cause investors to run to safe investments.

Maybe Europe is heading into its third recession in the past five years? Maybe China’s credit bubble will pop and cause a global panic?

Or, maybe the U.S. economy isn’t getting better, and there won’t be demand for loans and money. Maybe, after a miserable first-quarter GDP number, we’re looking at another recession, more disinflation, and maybe deflation. Maybe investors are afraid of that and are buying notes and bonds now before their yields fall further.

Maybe investors are concerned that stocks have risen too far and if the economy isn’t picking up their high prices won’t be justified?

This divergence – yields dipping when they were expected to rise and stocks rising when they were expected to dip – is what has analysts and investors nervous.

Of course, I’m watching this divergence, and you should be, too.

No one knows for sure what this divergence signaling, or whether it will self-correct, and what that correction will mean for stocks and bonds. But one thing’s for sure: We all better keep a close eye on the stock market and the bond market.

Source : http://www.wallstreetinsightsandindictments.com/2014/05/wall-street-insight-leads-us-maybe-territory/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in