Bad sign for stocks: Bond yields are white hot again

By Nicole Goodkind, CNN

2022 was the worst year on record for bonds. Despite a promising start, 2023 is starting to look rough, too.

The recent global bond rally appears to be tapering off as investors are getting a cold wet dose of reality about Fed rate hikes.

Bad news for bonds could spell bad news for stocks: Bond yields, which move in the opposite direction of prices, represent the opportunity cost of investing in equities — if a bond is yielding more than equities, it’s generally more attractive, because it comes with less risk than stocks. After all, Treasuries are backed by the US government. Bonds compete with stocks for investors’ dollars, and when yields go up, equities often go down.

What’s happening: Persistent inflation and strong economic data signals that interest rates are going higher and will stay there for longer. That tonal shift has sent stocks lower and Treasury yields higher, as investors rethink their views on the path of interest rates. US stocks had their worst week of the year last week, and Monday’s feel-good rebound fizzled out at the end of the day.

Just look at US short-term bonds, which closely track investors’ interest rate expectations: Two-year yields began Monday at their highest level since July 2007, before easing a bit.

What went wrong: Wall Street jumped head first into the bond market during the first few weeks of 2023, sending yields lower, as investors became convinced that the Federal Reserve’s painful rate hiking regimen would finally be coming to an end.

After a particularly tough 2022 (US Treasuries recorded their worst year in history), investors reversed course. Falling yields pushed up stocks, creating the giddy highs we saw, but that all reversed in February when we got the good news/bad news on jobs and retail sales data. The bond market (and equities) have now basically done a 180.

The yield on 10-year Treasury notes increased toward 4% last week, the highest it’s been since 2008. Last week also marked the first time in 2023 that returns on Treasury investments have turned negative.

At the end of January, the market was pricing the peak Fed funds rate at under 5%; Now it’s almost half a percentage point higher than that.

“The general view is that the market wasn’t listening to the Fed” when it made its surprisingly high rate projection in December, said Kit Juckes at Societe Generale.

The market “is listening now,” Juckes said. If anything, investors think the Fed might have undersold how high rates need to go.

Why it matters: The Dow, which has fallen for four weeks in a row, is now in negative territory for the year as bond yields continue to rise.

The best opportunity for investors is in bonds, not equities, say experts:

A team of JPMorgan strategists led by Marko Kolanovic echoed that sentiment. “The risk-reward of holding bonds at this level of short-term yields looks better than [equities] than any time since the great financial crisis,” they wrote in a note.

Janet Yellen, TD Bank and Elon Musk: What investors are watching today

▸ Investors may be preparing for the worst when it comes to sticky inflation, but US Treasury Secretary and former Federal Reserve Chair Janet Yellen has different ideas.

In an exclusive interview with CNN’s Melissa Bell from Kyiv, Yellen said she believes US inflation remains too high but that a soft landing is on the radar. The Federal Reserve’s efforts to date to bring down inflation while maintaining a strong labor market appear achievable, she added.

“I would say, ‘So far, so good,'” said Yellen.

“Obviously there are risks, and the global situation we face is very uncertain,” she said. “There can be shocks from it. But look, inflation still is too high, but generally if you look over the last year, inflation has been coming down. And I know the Fed is committed to continuing the process of bringing it down to more normal levels, and I believe they’ll be successful with it.”

▸ It’s been a long time coming — about a decade — but TD Bank will pay $1.2 billion to settle a lawsuit alleging its involvement in an infamous $7 billion Ponzi scheme orchestrated by disgraced financier Allen Stanford in 2012.

Toronto-Dominion Bank agreed to pay $1.205 billion to a court-appointed receiver who will in turn pay back victims of the scheme. But the bank denied any wrongdoing, it said in a statement Monday

Stanford was sentenced to 110 years in prison in 2012 after being found guilty on 13 counts of fraud-related charges in Houston. Prosecutors charged that Stanford sold billions of dollars in fraudulent certificates of deposit administered by Stanford International Bank Ltd., an offshore bank in Antigua, ensnaring thousands of victims.

▸ Elon Musk has reclaimed his spot as the world’s richest person, according to Bloomberg rankings, with an estimated net worth of $187 billion.

The controversial Tesla and Twitter executive had briefly lost his spot to LVMH chairman Bernard Arnault (worth $185 billion). His wealth, however, has been buoyed by a 70% pop in Tesla stock this year. The electric automaker has seen a surge in investor activity amongst signs of economic strength, lower interest rate hikes from the Federal Reserve and price cuts on some of its vehicles.

It’s been a rapid comeback for Musk. He began the year with a net worth of $137 billion after becoming the first person to lose $200 billion as Tesla stock plummeted and troubles beset his takeover of Twitter.

Where have all the workers gone?

The labor force participation rate is currently sitting about one percentage point below its February 2020 levels. That means more than two million people haven’t come back to the jobs market.

So who are they and where did they go?

In a new report, Bank of America attempted to shed some light on the situation by analyzing data on its customers who stopped receiving paychecks during the pandemic. Here’s what they found.

Older workers: “The demographic breakdown of these missing workers suggests they are mostly older,” write Bank of America analysts. About 30% of The Greatest Generation and 23% of Baby Boomers are no longer receiving paychecks, more than double that of Gen X and Millennials, they found. While it’s not a surprise that older workers retired during the pandemic, more people retired than population trends would suggest, they found. “Many exited the labor force early with poor health,” they said. “In our view, it is unlikely these workers will return.”

Restaurant and retail workers: Most of these prime-age workers that have exited the labor force left the restaurant and retail sectors, the study found. “In addition, our data also finds that missing prime-age workers tend to be lower earners, often working in retail and hospitality.”

Caregivers: Bank of America data shows that the number of customers making childcare payments as of December 2022 was 7% lower than at the beginning of 2020, indicating that a chunk of workers may have left their jobs to become full time caregivers to children.

“Given all the possible reasons that have kept people away from the labor force — retirement, health conditions, caregiving responsibilities and migration — it seems unlikely these trends will reverse quickly,” the study concluded. “As a result, although Fed rate hikes could slow the labor market in the coming months, we think labor supply faces persistent headwinds in the longer run.”

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