Amid the risk asset boom, rising US rates cast a shadow over stocks and bitcoin

by News Desk 1 year ago Banking&Finance US Treasury

A 10-year Treasury yield reaching a 15-year high of 4.366%

Increasing US Treasury yields are causing concern in riskier segments of the market, leaving investors uncertain about the potential impact on a rally that has lifted various assets, including stocks and bitcoin, throughout the year. Robust economic growth has raised expectations that the Federal Reserve will maintain higher interest rates for an extended period, leading to a climb in Treasury yields to levels not seen since 2007. This ascent has become harder for holders of stocks and other speculative assets to overlook, despite their steady rise in the face of increasing yields.

The S&P 500 has experienced a 4% decline this month, coinciding with the US benchmark 10-year Treasury yield reaching a 15-year high of 4.366% on Tuesday. Concurrently, the S&P 500 technology sector has fallen by 5.7%, bitcoin by over 10%, and the ARK Innovation ETF—comprising many high-growth names—has witnessed an 18.5% drop. Although stocks rose, with the S&P 500 closing up 0.7%, futures indicate a further rise. The surge in Treasury yields, which move inversely to bond prices, poses a challenge for speculative assets by offering investors attractive payouts on what is perceived as a relatively risk-free investment backed by the US government. Rising rates also elevate the cost of capital across the economy, making it more challenging for individuals and companies to service debt.

A pivotal moment for the markets looms later in the week with the annual meeting of central bankers in Jackson Hole, Wyoming. Federal Reserve Chair Jerome Powell is scheduled to deliver a speech on the economic outlook. US investors have been net sellers of equity funds for three consecutive weeks, according to the latest Refinitiv Lipper data. Simultaneously, they have been attracted to high yields in money market funds, pouring in approximately $32.5 billion over the past week, marking the largest inflow. Investor equity positioning, as measured by Deutsche Bank, has declined for a fourth consecutive week to a two-month low. Despite this, betting against stocks has proven unprofitable this year, with many investors confident that equities will remain robust in a year marked by a rebound from recession fears and banking sector upheaval. The S&P 500 has gained 14.6% year-to-date.

Goldman Sachs strategists noted on Monday that equity holdings by retail and institutional investors remain below historic norms, suggesting potential additional fuel for the bull market if the economy continues to perform strongly. Randy Frederick, managing director of trading and derivatives for the Schwab Center for Financial Research, anticipates that S&P 500 earnings likely bottomed out in the second quarter and will expand in the third quarter, potentially propelling the index to a record high by the end of the year. Despite being over 8% below its January 2022 closing high, the S&P 500's trajectory remains a topic of interest for market participants.
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