NEW YORK (AP) – Interest rates continue to rise, and Wall Street continues to shake because of it.
The 10-year Treasury yield rose more than 1.50% on Thursday, boosted by comments from the Federal Reserve Chairman and helped send shares on Wall Street on another slide. The rate at which yields increased has forced investors to reconsider how they value stocks, bonds and any other investment. And the immediate verdict was to sell them at lower prices, especially the most popular investments in the last year.
Yields have risen optimistically for an economic recovery after a year of coronavirus misery, along with expectations for higher inflation that could accompany it. This is essential because these yields form the cornerstone that the financial world uses to try to find out the value for everything from Apple shares to an unwanted bond.
For years, yields have been extremely low for Treasurys, which means investors have earned very little in interest on their holdings. In turn, this has made stocks and other investments more attractive, raising their prices. But as Treasury yields rise, so does the downward pressure on prices for other investments. Here’s a look at why recent moves have been so rocky:
WHY DO THE TREASURY ANSWERS REMAIN?
Part of this is rising inflation expectations, perhaps the worst enemy of a bond investor. Inflation means that future bond payments will not buy as much – because the price of a banana or a bouquet of flowers will be higher than it is today. So, when inflation expectations rise, bonds are less desirable and their prices fall. This increases their yield.
Treasury yields are often reflected in the growing expectations of the strength of the economy. When the economy is healthy, investors feel less need to hold treasuries, considered to be the safest possible investment.
WHY DO THE PRICE OF THE MANDATORY BONDING OBLIGATION MEAN?
Suppose I bought a $ 100 bond that pays 1% interest, but I’m worried about rising inflation and I don’t want to be stuck with it. I’m selling it to you for $ 90. You get a return of more than 1% on your investment, as regular bond payments will still be the same amount as when we held it.
WHY ARE EXPECTATIONS EXPECTED FOR INFLATION AND GROWTH?
We hope that coronavirus vaccines will make the savings hum this year, as people feel comfortable returning to the shops, business will reopen and workers will get jobs again. The International Monetary Fund expects the global economy to grow by 5.5% this year, after falling by 3.5% last year.
A stronger economy often coincides with higher inflation, although it has generally been in decline for decades. Congress is also close to investing another $ 1.9 trillion in the US economy, which could further boost growth and inflation.
WHY DO PRICES AFFECT STOCK PRICES?
When trying to figure out what a stock price should be, investors often look at two things: how much money the company will earn and how much to pay for every $ 1 of that money. When interest rates are low and bonds pay less, investors are willing to pay more for the second tranche. I don’t lose too much income if I put this money in a treasury.
AND NOW ARE THE RATES CURRENT?
The recent rise in returns is forcing investors to cut back on how much they are willing to spend for every $ 1 of the company’s future earnings. This raises difficult questions, especially when critics already argued that stocks were approaching dangerous levels after their prices rose much, much faster than profits.
Shares with the highest prices relative to earnings are severely affected, as are shares that have been auctioned for their expected future profits. Big Tech shares are on both sides. Shares that pay dividends are also affected, as investors looking for income can now turn to bonds, which are safer investments.
The ultimate concern is that inflation will take off at some point, sending much higher rates.
ARE THE INTEREST RATES NOT YET INCREASED YET?
Yes, even at 1.54%, the 10-year Treasury yield is still below the level of 2.60% it was two years ago or the level of 5% two decades ago.
“The concern is not that 10 years is 1.50%,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “It went from 1% to 1.50% in a handful of weeks and what does that mean for the rest of 2021.”
He thinks it could continue to grow above 2% by the end of the year, but he doesn’t see it returning to the old normal of 4% or 5%, which would force an even greater revaluation for the markets. Until this becomes clearer, however, he says he is looking for the stock market to remain volatile.
STOCKS ARE NOT YET TRUE YET?
Yes. Despite the recent withdrawal from the market, the main US stock indices remain close to the historical highs set in the last month. The S&P 500 is still 4.2% of the February 12 record.
Did the Fed not say it would keep interest rates low?
Yes. The Federal Reserve has direct control over short-term interest rates, and President Jerome Powell has repeatedly said he is in no hurry to raise them. It also does not intend to reduce its monthly bond purchases by the $ 120 billion used to put downward pressure on long-term rates.
Powell said the Fed will not raise its benchmark interest rate, now to a record low of 0.25%, until inflation slightly exceeds the 2% target level. Powell has repeatedly said that while price increases could accelerate in the coming months, he expects these increases to be temporary and not a sign of long-term inflation threats.
He reiterated those statements on Thursday, but analysts said long-term yields have risen with disappointment that Powell has not offered anything stronger to cut recent cuts.
“We believe that our current political position is appropriate,” Powell said.
IS WALL STREET OPTIMISTIC?
Yes, much of Wall Street still expects stocks to rise further. One reason is that many investors agree with Powell and expect inflationary pressures to be only temporary. That should keep rates from rising to dangerous levels.
Also, after a bleak 2020 for most companies, investors believe that the growth of corporate profits will explode more as more and more people receive COVID-19 vaccines during the year and the economy is gradually approaching something close to normal. If earnings increase enough, stocks may remain stable or may even rise, despite rising rates.
ARE SOME COMPANIES DOING WELL WHEN THE RAYS HAVE INCREASED?
Financial companies, especially banks, have recently gained ground, as rising interest rates could mean higher profits from a variety of consumer loans, including mortgages. And if rates rise in inflation fears, energy companies could benefit if prices rise for oil and other commodities as well.
In general, however, raising interest rates is an obstacle for companies, as they make loans more expensive. This is especially painful for companies such as real estate investment trusts or REITs, which require a lot of money and often debt to operate.
People who rely heavily on credit can also reduce it, which could have a negative effect on all types of companies that rely on consumer spending.