The market’s stalling this morning as treasury yields creep higher once again. Stocks initially plummeted shortly after the open, but eventually got back to near-level around noon.
The nervousness being felt by investors has contributed to an exceptionally choppy trading environment. It seems like another sell-off could happen at any minute, likely accompanied by a spike in yields.
“Interest rates just won’t cut a break for this market,” said CNBC’s Jim Cramer, exasperated by the ongoing instability.
Tech stocks, which rely on cheap debt for fast growth, are reeling as yields rise. Other growth stocks are falling, too, hampered by yet another bond rout.
Yesterday, many analysts had declared an end to yield fears. Wall Street agreed, saying that while yields should continue climbing, stocks would be able to handle their slow ascent.
For the most part, that’s exactly what’s happening this morning. The 10Y yield uptrend is intact and high-flying tech firms are dragging down the major indexes.
“While the S&P 500 may be facing structural head-winds due to tech weakness, much of the rest of the market is actually doing quite well,” explained Tom Essaye, Sevens Report founder, in a note.
“Overall, most non-tech stocks are weathering the increase in bond yields quite well.”
Tech could enjoy a nice reprieve, however, if rumors about Fed Chairman Jerome Powell prove to be true. In a virtual event, scheduled for noon EST tomorrow, at least one analyst is expecting Powell to unveil a controversial change to the Fed’s bond-buying practices.
DataTrek co-founder Nick Colas asks:
“Will [Powell] preview a change in the central bank’s quantitative easing program, one that shifts purchases to the long end to bring down 10-year Treasury yields?”
The Fed has yet to point its “liquidity cannon” at 10 Year Treasury Notes during the post-Covid recovery. Colas thinks that it might happen, though, given the Fed’s past attempts to control the yield curve.
“The San Francisco Fed published an analysis in 2011 about the 1961 ‘Operation Twist.’ It found that the net effect was to push long-term yields down by 0.15 percentage points. The paper says this was ‘highly statistically significant, but moderate,’” Colas wrote.
The Fed then enacted “Operation Twist 2.0” when it tilted yields from September 2011 – December 2012. The 10Y yield dropped from a peak of 3.75% to a low of 1.44% during that time. Then, once the manipulation ended, the 10Y yield rose above 3.0% over the next year.
Colas’ conclusion is that “the Fed can absolutely suppress long term interest rates by 100 [basis points] or more.” He also believes the Fed’s ability to do so “will be on investors’ minds as they tune in to hear Chair Powell this Thursday.”
And though not every investor will be clued in to the “Twists” of the past, some may be disappointed if Powell doesn’t reveal “Operation Twist 3.0” in his remarks.
With stocks on such shaky ground already, it seems nearly anything could kick off the next correction.
Including a Fed that refuses to reduce longer-term rates.
