Wall Street sinks again as bond yields rise

Fuel on fire

Global Markets: Stocks plunge as US jobs data spikes bond yields

To take that risk, one would certainly seek a risk premium over risk-free assets.

We already knew that high market valuations were likely to exacerbate volatility, as was the absence of any meaningful pullback in all of a year ago. "I think it's a healthy development".

"Stocks look like they are set for a correction of some sorts after huge losses over the last few sessions that has left many bulls anxious that the bull run may have come to an end", said AxiTrader analyst James Hughes. "If you think about it, if bond yields go higher, they offer more of a reward", said Chris Harvey, Wells Fargo & Co's head of equity strategy.

The Dow dropped 1,032.89 points Thursday, it's second-largest point drop, to 23,860.

Some believe the 3 per cent yield is inevitable. The correlation between German and USA 10-year notes stands at north of 0.6. The BEER ratio (bond yield/equity yield) now stands at 1.85, suggesting that equities are overvalued. Bull markets don't typically die of old age, they are usually killed by central banks aggressively hiking interest rates.

In a sign of middling demand, Treasury's $16 billion 30-year bond sale on Thursday drew a below-average bid-to-cover ratio, with indirect bidders taking the smallest share since September.

What is making bond yields rise? There are also concerns over a possible spike in inflation after the Budget proposal to hike minimum support prices (MSP) of crops. "It's an equity storm, created by the pressure from bonds", noted ETX Capital analyst Neil Wilson.

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Yields move in the opposite direction of debt prices.

Rising inflation isn't always a bad thing.

The percentage of individual investors expecting stock prices to drop is at a three-month high of 35 percent, according to weekly survey results released Thursday by the American Association of Individual Investors. Still, that's a long way from the double-digit interest rates of the early 1980s.

Still, this concept is usually in the background when people wonder about the staying power of a bull market, one that has gone for nearly nine years with nary a peep out of Treasuries. European Central Bank too picked up even junk bonds from various countries.

"If 2.88 scared people why would they be comfortable with 2.84/2.85", said Schumacher.

Earlier on Thursday, the 10-year US Treasury note yield rose as high as 2.884 per cent, nearing Monday's four-year peak of 2.885 per cent, after the Bank of England said interest rates probably needed to rise sooner than previously expected.

Stronger-than-expected wage growth data for January last week stoked inflation expectations, underlining worries the Federal Reserve would prove more aggressive than anticipated in lifting interest rates.

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The Dow closed below 24,000 for the first time since late November.

In the United States, recent economic data, including Friday's wage growth and inflation, has been positive. "The underlying fundamentals of the economy are really strong". A rise commodity prices also raises inflation.

Oil sank as record-high US crude output added to concerns about a sharp rise in global supplies.

The economy is strong, but investors are anxious about inflation, and the possibility that the Federal Reserve will raise interest rates faster than expected to fight it.

Wall Street is clearly trying to figure out whether this is the big one as the Fed gradually pushes official borrowing costs higher. "There is no doubt interest rates will rise and liquidity will be withdrawn but it will be gradual and calibrated in nature", said Shah of Kotak Mutual Fund.

However, rising bonds does not always lead to poor equity performance.

Similarly, between May 2003 and June 2006, a 177 bps surge in the UST 10-year yield failed to deter U.S. equities from notching up 32 per cent gain.

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