By Sunny Oh
MarketWatch photo illustration/iStockphoto
Bond investors stayed pessimistic on the U.S. economy’s prospects for most of this year as the coronavirus pandemic swept around the world, even as the stock market recovered from its late March lows, but even U.S. Treasury traders are now seeing signs of light at the end of the tunnel, sending yields up sharply this week.
The rise in yields is raising questions among some on Wall Street about what a bearish bond market portends for the stock market’s trajectory in coming weeks, amid worries that the S&P 500 index’s spectacular rally from its March 23 lows is becoming overextended.
Investors mostly suggest rising yields are bullish for equities as bond buyers finally come around to the stock-market’s view that efforts to restart business activity closed down by the pandemic will allow a robust U.S. economic recovery to take hold this year.
Up to this week, the stark divergence between high-flying equities and depressed bond yields was undermining investor faith in a further rise in risk asset prices which have already mounted substantial gains in the past few weeks.
“Something had to give. Either risk assets had it all wrong, or rates were too bearish on the economy. Now it seems the rates market has begun to creak,” said Padhraic Garvey, regional head of research at ING, in an interview, noting the bond-market was last to join in the reflation narrative, with beaten-down emerging market bonds and equities showing inflows last week.
For the week, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.44% rose 6.8%, the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.05% gained 4.9%, while the Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.66% advanced 3.3% and the Nasdaq-100 /zigman2/quotes/210598364/realtime NDX +0.76% rose 2.8%.
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -2.03% rose 8.5 basis points Friday to end at a ten-week high of 0.90% on Friday, and may be on its way to hitting the 1% level. At the end of last week, the benchmark’s yield stood at 0.65%, in comparison.
After all, bond investors usually take pride in being better prognosticators on the twists and turns of U.S. economic growth, more so than their eternally cheery counterparts in the equities market. This characterization of savvy bond traders may have taken a hit as expectations for a growth rebound show up across several corners of financial markets.
The stock-bond disconnect in part reflected concerns by Treasury investors as to whether the trillions in financial assistance approved by Congress and the Federal Reserve would be enough to reflate the economy.
The U.S. government has injected some $3 trillion in fiscal stimulus into the economy, while the Federal Reserve’s balance sheet rose to $7.21 trillion as of June 3, amid efforts to mitigate the severity of the economic downturn wrought by business closures to limit COVID-19’s spread. Those measures have been often cited as one of the key reasons behind the stock market recovery from its March 23 lows.
But the May U.S. jobs report from the Labor Department on Friday may have finally ended those worries, offering one of the first data points showing the effectiveness of the stimulus policies, suggesting that the worst of the economic devastation from the COVID-19 pandemic may be over.
The U.S. economy added 2.5 million jobs in May, well above the MarketWatch-polled consensus of 7.25 million job losses, while the unemployment rate fell to 13.3% from a post–World War Two record of 14.7% in April.
“A [jobs] report like this certainly calls that view into question,” Bill Callahan, investment strategist at Schroders, told MarketWatch.