Rising bond yields keep world stocks on shaky ground

Eileen GuzmanFeb 09, 2018

The dread that gripped equity markets earlier in the week re-emerged Thursday as USA stocks plunged into a correction on concern that rising interest rates will drag down economic growth. However, a flight to safety away from stocks and back into government bonds knocked the 10-year back down to 2.82% by early afternoon.

To some extent, longer-dated United States treasury bond yields have been playing catch up with the front-end of the U.S. treasury curve, as shorter-dated yields had already seen a meaningful rise in the fourth quarter of 2017.

United Kingdom government bond yields rose too after the Bank of England said interest rates probably needed to rise sooner and by a bit more than it thought three months ago and raised economic growth forecasts for Britain.

The market performance also reflects the strong US and global economies, which have boosted corporate profits.

Irrespective of short-term market movements, we believe that we are returning to a more "normal" cycle of higher yields and higher interest rates.

"Now we are having acute attention on what happens in the bond markets, so when yields move up there is an unsettling feeling in the equity market".

"There are two things on the table that are really driving the concerns".

The Dow Jones Industrial Average fell 511.44 points, or 2.05 percent, to 24,381.91, the S&P 500 lost 45.75 points, or 1.71 percent, to 2,635.91 and the Nasdaq Composite dropped 131.34 points, or 1.86 percent, to 6,920.65.

Emerging market stocks lost 0.95 percent.

A pan-European index of stocks hit its lowest level in six months at one stage and closed the day 2.4 percent lower.

A brightening outlook internationally is adding to pressure on global fixed income markets. For now, our core view is it will be an orderly transition, as equity markets remain underpinned by solid global growth and strong corporate earnings.

"We're going to continue to see volatile days", said JJ Kinahan, chief market strategist at TD Ameritrade. The rise in Treasury yields pushed VIX's bond-market cousin (TYVIX) to its highest since April, while a measure of currency volatility is also near its highest level since April.

While the deal was a rare display of bipartisanship that should stave off a government shutdown, it looks set to widen the USA federal deficit further and could fan inflation. S. federal deficit further and could fan inflation.

In Germany, the euro zone's benchmark debt issuer, 10-year bond yields rose to 0.774 percent, their highest since September 2015.

Euro zone yields were also higher on the day while a hawkish message from the Bank of England on interest rates, pushed United Kingdom stocks down around 1 percent and lifted yields on United Kingdom government bonds to the highest since 2015. USA stocks resumed their slide and oil touched its lowest level of the year.

Oil prices fell after data showed USA crude output had reached record highs and the North Sea's largest crude pipeline reopened following an outage.

USA crude (CLc1) fell 1.99 percent to $64.15 a barrel, while Brent (LCOc1) fell 1.4 percent to $67.62.

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