Will Rising Bond Yields Set Back the Stock Market?
While some traders fear rising bond yields could crimp stocks' gains, some bond strategists do not expect interest rates to rise beyond the range of the past year.
"We look at 2011 as a trading, not trending year," said William O'Donnell, who heads rates strategy at RBS. He expects the 10-year yield to stay in a range of 2.75 percent to 4 percent, the top of its 2010 range."I know the economy is percolating along. Our economic staff does not think it's sustainable at the pace we've seen in the last couple of months," he said. Some of the worries are a possible, further 7-10 percent decline in housing prices, high unemployment and now, rising gasoline prices, he said.
Higher rates caught the attention of stock traders once more this week, as a thinly traded bond market saw rates ricochet higher and lower, around two Treasury auctions Tuesday and Wednesday.First, the Treasury's 5-year auction Tuesday suffered from seriously weak demand, kicking off bond selling and triggering a resulting inverse move higher in yields.
Treasury yields then relaxed going into Wednesday, as buyers moved in, and finished the day lower after a strong showing at the Treasury's $29 billion 7-year auction.
The 10-year ended Wednesday with a yield of 3.37 percent, well below Tuesday's 3.48 percent close, and very near where yields began a volatile trading day Tuesday morning. The 10-year yield again edged higher to 3.4 percent Thursday, after a much stronger-than-expected Chicago purchasing managers' report.Peter Boockvar, equities strategist at Miller Tabak, said aside from this week's action, the recent backup in rates since November is indicative of more to come."I think the violence of the move is pretty telling. It's not like this is a small market. It's a multi-trillion dollar market, trading like an internet stock, which is pretty amazing. It tells me there's a definite change here," he said. "The main theme in 2011 is that it's the bond market more than anything that will determine how equities go. There's nothing that can spoil a party in equities more than higher interest rates."
Wells Fargo Advisers chief equities strategist Stuart Freeman, however, does not see rates as an issue for stocks going into next year. "If you move up to 4 percent or even 4.25, perhaps that's something that's going to be more of an issue," he said. He expects the 10-year to be at 3.5 percent at the end of 2011, but he says that level could be surpassed if the economy proves stronger than expected....MORE