On Thursday, stocks made slight headway for the third consecutive day. Better economic news drove Treasury yields higher, putting pressure on higher-yielding sectors and bonds.
Signs of an economic recovery were confirmed as jobless claims fell to 323,000 versus an expected 330,000. And ADP reported that 176,000 new private-sector jobs were created in August, which matched expectations.
The yield on the 10-year Treasury bond rose to 2.98%, up 8 basis points, confirming the trend of higher interest rates that began three months ago in anticipation of a Fed cutback in its bond purchase plan.
As interest rates rose, interest-sensitive sectors were hit. Utilities and telecom services fell 0.4%, and consumer staples were off 0.1%. For the quarter, consumer staples are down 0.6%, telecom has lost 2.9%, and utilities are down 2.4%.
Utility stocks, often bought for a combination of modest growth and high dividend yields, were hit hard Thursday by the jump in interest rates. The group has fallen below its 200-day moving average before. In fact, this is the third time it has pierced it this year. However, this is the first time since March 2009, when the index bottomed, that it has fallen under its bullish support line.
This daily chart of the 30-year U.S. Treasury bond graphically illustrates the gradual increase in rates from July of last year and then the dramatic jump in rates that started in May. This, of course, was when talk of the termination of the Fed’s bond purchase plan became common.
Conclusion: The focus on jobs is the most important driver of the Fed’s bond purchase plans. So when jobs increase it is a signal to the central bank that the economy is better able to stand on its own and doesn’t require $85 billion a month in Fed money to stabilize economic growth.
Months ago, bond fund holders were warned to get out of the bond market, because when the Fed stops buying the funds would be crushed. Like any other market, the pendulum will swing too far — in this case it will be in the direction of higher yields. Some bond experts think that prices are already low. But it was just five years ago that the 10-year Treasury yield was above 5.5%.
When the Fed announces the beginning of the cutbacks in buying, another avalanche of sellers may hit the market. At that time, savvy buyers could enter an oversold bond market.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.