The U.S Treasury and Corporate fixed income Market
The price of the 22 trillion Dollar U.S Government debt market increased sharply as yields decreased after going on a hike earlier. Yields rose earlier as investors embrace themselves for higher inflation expectations and believing, unlike the Federal Reserve, that’s it’s here to stay.
As investors feared inflation pressures, they dumped their U.S government bonds as the previously low yields no longer compensate the high inflation percentages.
One should however take into consideration that the real yield, not the nominal yield on bonds, is still negative.
The U.S. highly watched benchmark that sets the entire financial market in place, the 10-year U.S Treasury note yield fell to as low as 1.12%. Yields Decrease when Prices Increase.
This came unexpectedly and opposite to the books as strong economic data and the Federal Reserve’s optimism on the economy and plans to end the stimulus that was initiated when the Covid-19 pandemic broke usually sends yields higher.
This comes in contrary to what most analysts predicted. They expected that yields will reach 2% by year end. The average forecast of analysts compiled by FactSet stated that the 10-year U.S treasury note yield will increase to 1.8% from the current rate on 1.31%.
This comes as analysts believe that the Federal Reserve’s plans to tighten the monetary policy should lower inflation pressures on the economy and therefore, keep a lid on the yields of the fixed income market.
This increase in yields, although lower than expected, will still have its toll on the stock market that has been enjoying higher valuations for some time now.
Bond yields affect equities in many different ways. Lower bond yields make stocks look more attractive to investors as they generate higher returns than the low yielding fixed income market. Lower bond yields also increase the valuations of stocks, making them again more attractive. Any increase in yields will have the reverse effect on stocks.
What’s more important than an increase in yields is the speed at which these yields increase. a big increase, say 0.7% in a short period of time would have drastic effects on the equity market.
Away from the government debt market and into the U.S Corporate debt market. As the Delta Covid Variant starts stirring up fears into investors, they backed out of the Corporate fixed income, specifically those of the highly sensible Covid-19 firms.
Those corporations include cinema operators (AMC), cruise companies, and retailers. Bonds of Companies in such industries all fell in price.