10-year U.S. Treasury Yield Reaches Highest Level Since 2011
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 10/05/18. Rates and Economic Calendar Data from Bloomberg as of 10/08/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets finished firmly lower last week. In the U.S., the S&P 500 Index retreated 0.95% while technology stocks were hit even harder as seen in the 3.18% decline of the NASDAQ Composite Index. Overseas, developed markets and emerging markets posted negative 2.34% and 4.48% returns respectively.
The first week in the final quarter of 2018 got off to a strong start when it was announced that the U.S. and Canada finally were able to secure a trade agreement. The agreement rejoins the three countries in terms of trade with the United States-Mexico-Canada Agreement (USMCA). Later in the week more positive news rolled in as private payrolls increased by the biggest monthly gain since February, U.S. services activity surged to its highest level since 1997, and Federal Reserve Chairman Jerome Powell praised the strength of the U.S economy. These factors, among others, sent bond yields soaring (and bond prices falling). While the 10-year U.S. Treasury breached the 3% mark in September, the yields increased even more to 3.25%, before settling at 3.23%, at the close on Friday last week. Also worth noting, the gap between the 2 year and the 10 year U.S. Treasury yields widened helping alleviate some concerns of an inverted yield curve, often seen as a potential indicator of a recession.
In the midst of all this seemingly positive economic news, it appears that equity investors are struggling with the idea of rising interest rates, and possibly rates that are higher than many expected. Stocks took a turn mid-week, continued their downward trajectory late in the week, and have spilled into the Monday morning activity this week. An increase in interest rates often may lead to a shift from risk assets (ex. equities) to fixed income. However, because rates are rising on the foundation of a strong U.S. economy, we are not overly concerned with the outlook for stocks at this time. Rates are going up for the “right reasons”. With this said, geopolitical events, unexpected increases in interest rates (in terms of the pace or magnitude), and ongoing trade negotiations will continue to create volatility in the capital markets.
As a result, we encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolio through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame and tolerance for risk.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.