Sightline Weekly Market Update: Interpreting Higher Treasury Yields
Most markets finished last week in positive territory after a roller-coaster ride, with the S&P and Dow both starting the week with strong performances. Rising interest rates and inflation fears dominated investor sentiment for the next three days, causing most equity markets to sell-off with technology shares falling off the most. It was exacerbated on Thursday by the Federal Reserve Chairman Jerome Powell at a panel organized by the Wall Street Journal, where he offered little support. While Powell said the recent bond market sell-off had his attention, he affirmed previous policy statements. He stated he would not let financial conditions tighten but gave no concrete actions.1 The markets did not respond favorably and accelerated the sell-off Thursday afternoon. By Friday, the equity markets recovered after three days of losses on economic data and positive vaccine access news.
Energy was the big winner for the week, with oil prices closing the week at $66.28, up 7.8%, and year-to-date up 36.6%. The TSX gained 1.87% for the week on the energy and financials sectors’ strength, as did the Dow Jones, jumping 1.82%. The S&P 500, a broader-based index, only managed a gain of .81% for the week; however, the Nasdaq fell over 2% on weakness in the technology sector. The S&P Midcap and Russell 2000 were flat to slightly negative on the week.
The week started on a high note Monday as the Institute for Supply and Management (ISM) reported manufacturing activity at a three-year high despite shortages of chips, rising cost in materials, and labor shortages. The ISM reading of 60.8 in February outpaced the expectation of 58.8 and the January reading of 58.7. A reading above 50 indicates an expansion in manufacturing, which accounts for 11.9% of the economy.2
Rising longer-term interest rates, still at record lows historically speaking, continued moving higher. Investors’ fears are split between rising yields reflecting growth expectations and inflationary pressures. Many states have reduced restrictions on the hospitality industry, reflected in this week’s February report on job creation. According to the latest US Labor Department jobs report, the US economy added 379,000 jobs in February, exceeding consensus views ranging between 150,000 and 200,000 new jobs. Nearly all the gains came in the hospital and travel sectors. Modest gains came in the healthcare, retail, manufacturing and temporary help services with net job losses in state and local government education, construction and mining sectors. The unemployment rate declined slightly to 6.2%.3 The initial claims report released Thursday by the Labor Department showed an increase of 9,000 to 745,000 over the previous week’s revised number of 736,000. Continuing claims for all benefit programs fell by 1,018,763 to 18,26,537 compared to the same week in 2020 of 2,092,483.4
Slack in the labor market, mentioned on several occasions by the Fed Chairman, is one of the primary considerations for holding rates low. Inflationary fears dismissed by the Fed Chairman in previous statements as transitory resulting from pent-up demand stemming from stay-at-home orders were supported this week by the US Treasury Secretary Janet Yellen. Secretary Yellen commented, “I don’t see that the markets are expecting inflation to rise above 2% inflation objective that the Fed has as an average inflation rate over the long run.” In the Secretary’s mind, higher Treasury yields are “a sign market participants were anticipating a stronger recovery, not inflation.”5 Yellen also reflected that the US needs faster job growth to reach full employment by next year.
Rising rates will, in the short term, negatively impact bond portfolios. Once rates stabilize, bonds may again attract investments with higher coupons than are currently available other than alternative debt. Sightline Wealth has alternative debt solutions to protect portfolios from rising rate volatility, with coupon rates significantly higher than current yields available through traditional bonds.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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