Ever since the beginning of 2018, markets have been excessively volatile.
Granted, the economy is still as strong as ever with 4.1% unemployment, and robust GDP growth on the heels of consumer spending, but there have been hiccups along the way including fears of a trade war, tensions over Syria, and poor earnings.
In fact, Caterpillar warned that profit margins wouldn’t budge much from where they are right now, 3M also lowered its outlook for the year, and tech investors were less than amused after learning that capital expenditures at Google topped $7.7 billion.
Oh, and the 10-year bond yields hit 3% for the first time since 2014.
As Treasury yields rise, the belief is that investors will exchange stocks, for bonds, which would offer a higher rate of return. Car loans and mortgage rates are directly linked to the10-year note. So, if the yield rises, there’s concern it’ll also raise borrowing costs for companies and consumers.
Historically, a rising 10-year bond rate isn’t great news for stocks
“The calculus behind fear of the 3 percent yield seems obvious: With the S&P 500 dividend yield at 1.9 percent, a risk-free investment like U.S. Treasurys yielding 3 percent makes more sense in a volatile environment,” explained CNBC.
At the moment, many analysts are waiting to see if we’ll reach a level just below 3.05% on the 10-year, where it stood in January 2014. Should it rise above 3.05%, analysts believe we could run as high as 3.25%, which could really rattle investor emotions.
Another warning sign – short-term rates are moving higher, as well, which is causing the short-term bonds and the 10-year to narrow. This is also known as a flattening yield curve. That’s a problem because, if short-term rates move higher than long-term rates, it can lead to an inverted yield curve, which happens prior to most recessions, as noted by CNN.
But some analysts believe the fear is a bit overdone at the moment.
According to Market Watch:
Rising yields can cause heartburn for investors. After all, U.S. government bonds are considered the world’s safest asset, which means that moves can send ripples through global financial markets. Bears argue that a sustained rise in yields cuts against the narrative of historically low interest rates used to justify lofty equity valuations. A rise in yields also has implications for debt-servicing costs for corporations that have loaded up on leverage in response to historically low rates. But market bulls are confident that yields would have much further to rise before tearing up a bullish backdrop of strong earnings growth and a solid economic outlook.
In our opinion, the latest market drop only creates a buying opportunity.
We have to remember that markets are resilient and that underlying economic strengths are still in place. What you’re seeing is fear-based selling that’s likely to create a good deal of opportunity for smart and patient investors.
Stay tuned for more from The Cheap Investor.