NEW YORK (AP) – Interest rates continue to rise and Wall Street continues to tremble because of this.
The 10-year Treasury yield rose again above 1.50% on Thursday, boosted by comments from the Federal Reserve chairman, and helped send Wall Street shares into another dip. The speed with which the yield has increased has forced investors to reexamine how they value stocks, bonds and all other investments. And the immediate verdict was to sell them at lower prices, especially last year’s most popular investments.
Yields have been rising with optimism towards an economic revival after a year of coronavirus-induced misery, along with expectations of higher inflation that could accompany it. This is critical because these yields form the basis that the financial world uses to try to calculate the value of anything from Apple stocks to high-risk bonds.
For years, yields have been ultra-low for treasures, which means that investors earn very little in interest from owning them. This, in turn, made stocks and other investments more attractive, raising their prices. But when Treasury yields increase, so does the downward pressure on the prices of other investments. See why recent moves have been so difficult:
WHY ARE TREASURY INCOME INCREASING?
Part of this is rising inflation expectations, perhaps the bond investor’s worst enemy. 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. Therefore, when inflation expectations rise, bonds are less desirable and their prices fall. This increases your income.
Treasury yields also tend to keep pace with expectations of strength in the economy, which are growing. When the economy is healthy, investors feel less need for treasures, considered the safest investment possible.
WHY DOES BOND PRICE DROP MEAN INCOME INCREASES?
Let’s say I bought a $ 100 bond that pays 1% interest, but I’m concerned about rising inflation and I don’t want to be stuck with it. I sell it to you for $ 90. You are getting a return of more than 1% on your investment, because the regular payments from the bond will still be the same amount as when I owned it.
WHY ARE THE EXPECTATIONS OF INFLATION AND GROWTH RISING?
Coronavirus vaccines are expected to make savings vibrate this year, as people feel comfortable returning to stores, companies reopen and workers get jobs again. The International Monetary Fund expects the global economy to grow 5.5% this year, after falling 3.5% last year.
A stronger economy tends to coincide with higher inflation, although it has generally tended to decline for decades. Congress is also close to injecting another $ 1.9 trillion into the US economy, which could further boost growth and inflation.
WHY DO RATES AFFECT SHARE PRICES?
When trying to figure out what the price of a stock should be, investors often look at two things: how much money the company will earn and how much to pay for each $ 1 of that money. When interest rates are low and bonds pay little, investors are willing to pay more for that second installment. They are not losing a lot of revenue if they put that money in the Treasury instead.
AND NOW THAT THE RATES ARE RISING?
The recent rise in yields is forcing investors to cut back on how much they are willing to spend on every $ 1 of the company’s future earnings. This is giving rise to tough questions, especially when critics have already been arguing that stocks were approaching dangerous levels after their prices rose much, much faster than profits.
The stocks with the highest prices in relation to profits are being hit hard, as are the stocks whose profits were expected to rise in the future. Big Tech’s shares are in these two fields. Dividend-paying stocks are also hurt because investors looking for income can now turn to bonds, which are safer investments.
The final concern is that inflation will skyrocket at some point, raising rates much more.
ARE THE INTEREST RATES NOT YET TOO LOW?
Yes, even at 1.54%, the 10-year Treasury yield is still below the 2.60% level of two years ago or the 5% level of two decades ago.
“The concern is not that the 10-year term is at 1.50%,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “It’s just gone from 1% to 1.50% in a few weeks, and what that means for the rest of 2021.”
Ma thinks he may continue to rise above 2% until the end of the year, but he does not see it returning to the old normal of 4% or 5%, which would force an even greater revaluation for the markets. Until that becomes clearer, however, he says he is looking for the stock market to remain volatile.
Aren’t they still too tall?
yea. Despite the recent downturn in the market, all major US stock indices remain close to the highs recorded last month. The S&P 500 is still within 4.2% of its record set on February 12.
DIDN’T THE EDF SAY IT WILL KEEP LOW INTEREST RATES?
yea. The Federal Reserve has direct control over short-term interest rates, and President Jerome Powell has said repeatedly that he is in no hurry to raise them. Nor does it plan to cut its $ 120 billion in monthly bond purchases, used to push down long-term rates.
Powell said the Fed will not raise its base interest rate, now at its record low from zero to 0.25%, until inflation is slightly above its 2% target. Powell also repeatedly said that while price increases may accelerate in the coming months, these increases are expected to be temporary and not a sign of long-term inflation threats.
He repeated these statements again on Thursday, but analysts said long-term yields had soared due to Powell’s disappointment that he had not offered anything stronger to contain the recent increases.
“We think our current policy is appropriate,” said Powell.
WALL STREET IS STILL OPTIMISTIC?
Yes, much of Wall Street still expects stocks to continue to rise. One reason is that many investors agree with Powell and expect inflationary pressures to be only temporary. This should prevent rates from increasing to dangerous levels.
In addition, after a bleak 2020 year for most companies, investors are betting that corporate earnings growth will explode further as more people get COVID-19 vaccines throughout the year and the economy gradually approaches something. close to normal. If profits increase enough, stocks may be stable or perhaps even rise, despite rising rates.
ARE SOME COMPANIES WELL WHEN THE FEES ARE INCREASING?
Financial companies, especially banks, have recently won because raising rates could mean higher profits from a variety of consumer loans, including mortgages. And if rates are rising due to inflation concerns, energy companies can benefit if the prices of oil and other commodities are also rising.
Overall, however, raising interest rates is an obstacle for companies because it makes loans more expensive. This is especially painful for companies like real estate funds or REITs, which require a lot of money and, often, debts to operate.
People who rely heavily on credit can also cut back, which can have a ripple effect on all types of businesses that depend on consumer spending.