In terms of diversification between equities and bonds, there is none. Not anymore. They even nailed the bear market rally at the same pace.
By Wolf Richter for WOLF STREET.
The average 30-year fixed mortgage rate, after weeks of huge overnight volatility, was back at 6.25% on Tuesday, according to Mortgage News Daily. Today’s rate was roughly equal to the June 14th high of 6.28%, before the beautiful summer bear rally set in and turned everything upside down for a few months. With mortgage rates, this rally has now dissipated.
I call them Holy-Moly mortgage rates because that’s the sound people make when they calculate the mortgage payment at these rates to buy their dream cabin at today’s ridiculous prices (graphic via Daily Mortgage News):
Treasury yields surged, with some hitting multi-year highs.
The bear market rally was something. It started in mid-June and continued until mid-August. Bonds and equities surged, then began to slow the rise. While equities only partially unwound the bear market rally, mortgages and Treasuries have already fully unwound it.
The 1-year Treasury yield jumped 14 basis points, to 3.61%, the highest since November 2007. The spike began in November 2021, from near 0%. The bear market’s summer rally was shallow and barely visible in the long-term chart:
The 2-year Treasury yield jumped 10 basis points today to 3.50%, nearly matching last Thursday’s 3.51%, which was the highest since November 2007. The spike began in September 2021, when the Fed had its infamous kingpin, the real one, and the 2-year-old yield reacted instantly. The summer rally was a little more pronounced than with the 1-year yield:
The 10-year Treasury yield jumped 13 basis points today to 3.33%, the third highest since February 2011, behind only a few days in mid-June before the start of the summer bear market, which has now been squeezed out of the yield at 10 years:
The 30-year Treasury yield jumped 14 basis points to 3.49%, the highest since September 2011, after breaking above the November 2018 high. The summer bear market rally is clearly visible in the chart, but in line with other rallies of short time :
So now there’s all sorts of twists at hand about the end of the bear market rally that had been so fun this summer and ended in mid-August, when stocks and bonds started to fall again.
In terms of diversification between equities and bonds, there is none. At the time, there were. But not anymore. They were going up together – when bond prices go up, yields go down. And now they are falling together – when bond prices fall, yields rise. They even nailed the summer rally at a run. It’s just a matter of who moves faster.
Turning to the bond market, corporate bond issuance has revived as companies attempt to lock in still relatively low interest rates. According to Bloomberg, about 20 companies — including Lowe’s, Walmart, Deere and McDonald’s — are lining up $30 billion to $40 billion in bond issues this week, looking for buyers. And that apparently caused Treasury yields to skyrocket, or whatever.
There is always one reason or another that we can cite why yields rise and slow down the bear market rally.
At the most basic level, markets spent two months, from mid-June to mid-August, battling the Fed, dismissing its hawkish statements and quoting out of context to conjure up illusions that the The Fed was actually dovish and on its way to a pivot. As the crunch deniers rolled out and spread the gospel of the pivot, enough people took it seriously, and so there was the summer bear market rally.
But in mid-August, under strong comments from the Fed, the rally ran out of steam. And then came Powell’s speech in Jackson Hole on August 26, which cleared up any remaining confusion.
So now we’re back to the basics: the trajectory of inflation, QT ramping up to full speed this month, upcoming rate hikes and still well overinflated markets, as well as speculation on when the Fed would pause to let higher rates sink – to 4%? – and let them and QT do their magic to hopefully cool inflation and the labor market.
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