Stocks drifted higher on Monday in a quiet session. I guess traders were still trying to figure out why the Mayweather-Pacquiao fight was such a dud.
The big move was in Treasuries, which weakened to an extent that puts the post-2013 uptrend at risk. Long story short, another weak economic datapoint — a downward revision to March factory orders — further increased the hope that the Federal Reserve will hold off on raising interest rates until both growth and inflation rebound strongly.
That’s increasing inflation expectations in the Treasury bond market, pushing yields up and bond prices down.
In the end, the Dow Jones Industrial Average and the S&P 500 gained 0.3%, the Nasdaq Composite gained 0.2% and the Russell 2000 gained 0.4%.
The chart of the iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) shows the price damage underway in T-bonds. If you were thinking of buying a car or a home, now’s the time to lock in low rates.
Bank stocks were the day’s best performer, rising 1% on the drop in Treasury bonds on anticipation of higher net interest margins. This is the gap between short-term and long-term interest rates. And it’s a proxy for the profitability of the financial sector since they “pay” short-term rates on deposits and “earn” long-term rates on loans.
Bank of America (NYSE:BAC) gained 2.1%, pushing up the May $16 BAC calls recommended to Edge Pro subscribers last Wednesday to a gain of more than 117%. Further gains look likely as shares burst above their 200-day moving average for the first time since March.
Adding to the presumption that the Fed will hold tight on rate hikes were comments from Chicago Fed President Charles Evans, who is a voting member this year, reiterating his belief that “it likely will not be appropriate to begin raising the federal funds rate until sometime in early 2016.”
If it seems confusing that long-term Treasury yields are rising on the Fed’s reluctance to raise short-term interest rates, well that’s because it is. The Fed only maintains indirect control of the long end of the yield curve. While the level of short-term rates plays a role, long-term rates are more sensitive to expected future inflation and future economic growth.
If the Fed is hesitant, that increases the odds that inflation will heat up and growth will rebound.
Finally, the wild card this week is the situation in Greece. Negotiations are ongoing on a new bailout agreement for Athens concerning issues such as budget surpluses, assets sales, and labor reforms. It seems the country has enough cash to get through the week and make a payment of 200 million euros ($222.9 million) to the International Monetary Fund on Wednesday. Another payment of 777 million euros ($866.2 million) is due to the IMF on May 12.
Sometime between now and then, the European Central Bank could precipitate a run on Greek banks by tightening the collateral eligibility requirements these institutions use to borrow funds.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
