Making sense of market moves
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This newsletter is supposed to be fun to read, which means we only write about fixed income when we absolutely have to.
But some pretty strange stuff is going on in bond-land (on top of the confusing stuff that’s always happening there).
For some reason, the US 10-year Treasury yield keeps rising. After leaping 12 basis points on Monday, it jumped another 2 basis points yesterday—sending the 10-year Treasury yield above 4.206%, its highest level in over three months.
As a reminder, when bond prices fall, yields rise—which means as yields hit new recent highs, a big selloff is happening in the bond market.
Wait, didn’t the Fed cut rates?
Any Econ 101 professor would tell you that interest rate cuts should’ve hurt Treasury yields. But even though the Fed gave rates a 50 basis point haircut last month, yields have actually jumped since then.
Part of this is due to strong economic data, which has convinced bond investors that the Fed will cut rates more slowly, and at a more incremental pace, than they originally thought.
In addition, traders are also looking at new polls and prediction market odds that suggest Donald Trump could win the presidency, along with the GOP gaining a majority in Congress. Conventional wisdom says that with one party in charge of the government, spending will be higher, and the budget deficit would be larger. A bigger budget deficit means a higher supply of bonds, which in turn results in Treasury prices dropping.
Don’t forget the effects of a stronger US dollar. “The increasing likelihood of former US President Donald Trump securing a second term has also added to the USD rally, as investors price for proposed tariff extensions under a new Trump administration, which are expected to add inflation pressures that keep US rates elevated,” explained UBS CIO Americas Solita Marcelli.
On the other hand, junk—or corporate—bonds are faring far better. That’s because junk bonds tend to behave more like stocks, and rise when the economy is doing well.
To those of you who’ve read this far without skipping ahead to Movers & Groovers, congratulations! You’re now our favorite readers.—LB