Declining bond yields and growing expectations that the U.S. Federal Reserve is done raising interest rates have stocks marching higher today.
All three major indices are in the green as investors rush back into the relative safety of government bonds after a war between Hamas and Israel erupted this past weekend, sending bond prices up and causing yields to fall from their recent highs. The 10-year U.S. Treasury yield is currently at 4.65%, down from a recent peak of 4.80%. The benchmark 10-year yield is on track for its largest daily drop since July.
At the same time, comments from two Fed officials in the past day that the recent surge in bond yields could lead to the tightening in credit conditions that the central bank has been wanting and that the current cycle of interest rate hikes might be at an end, has investors feeling more confident to wade back into equities.
Dovish Fed Comments
The mood of investors and traders improved considerably after Atlanta Fed President Raphael Bostic said earlier today that the U.S. central bank does not need to raise interest rates any further and that he sees no signs of a recession on the horizon. Bostic’s comments follow ones made yesterday (Oct. 9) by Fed Vice Chair Philip Jefferson that rising bond yields could alleviate the need for more rate hikes.
“We are in a sensitive period of risk management, where we have to balance the risk of not having tightened enough, against the risk of policy being too restrictive,” said Jefferson, adding that the Fed needs to “proceed carefully” with any further increases in its Federal Funds Rate, which currently stands at a range of 5.25% to 5.50%, its highest level in 22 years.
The comments from Bostic and Jefferson are being viewed as a clear indication that the Fed may now forego any further interest rate hikes and that the Fed Funds Rate may now be at its peak. This has investors feeling confident to resume buying stocks, pushing the S&P 500, Dow Jones Industrial Average, and Nasdaq indices higher.
Stocks had been trending lower after U.S. Federal Reserve Chair Jerome Powell warned on Sept. 20 that the central bank was likely to raise interest rates at least one more time this year, comments that markets were not anticipating and didn’t like.
Bond Buying Returns
At the same time that Fed officials made their dovish comments, the war that has broken out in Israel has sent investors back into bonds, buying up the government debt instruments and pushing yields down from their recent highs. Investors and traders also wanted to see bond yields drop in order to feel confident to buy equities again.
There had been fears in recent days that the yield on the benchmark 10-year U.S. Treasury was about to surpass 5%. But now, the 10-year yield is tracking for its biggest daily decline since July, while the yield on the 2-year Treasury is on pace for its biggest daily drop since August of this year. Bond yields move inversely to prices.
Essentially, the decline in bond yields is taking some pressure off the stock market and leading to a relief rally among investors. Bonds are often seen as a safe haven in times of market and geopolitical stress, and investors have returned to them as the conflict between Israel and Hamas escalates. Also taking pressure off stocks today are crude oil prices, which are pulling back after rising 4% yesterday.
What’s Next
After a difficult two months, market conditions have suddenly improved. Two of the main issues that had been pressuring stocks are suddenly easing up at the same time — the fear of higher interest rates and steadily rising bond yields. These factors have stocks up today.
How long the rally lasts remains to be seen. Later this week, we’ll get an important inflation reading when the Consumer Price Index (CPI) for September is released. And on Friday (Oct. 13), the first of the big U.S. banks will release their third-quarter financial results. Both of these events can be expected to influence the direction of the stock market.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
