Treasury bond yields are followed by stock investors and changes in yield can impact the success of our trades. In particular, the 10-year treasury yield is used as a yardstick for critical financial issues like mortgages.
What is bond yield?
This is the interest rate paid by the US government for borrowing money when bonds are sold. Bonds are issued with a face value and a fixed interest rate and sold at initial auction or on the secondary market to the highest bidder. The 10-year Treasury note is a benchmark that guides other interest rates.
Investor confidence is reflected in Treasury yields
Confidence high: Bond prices will decline, and yields move higher as investors will favor alternative investments that offer higher investment returns despite the higher risk.
Confidence low: Bond prices move up as demand increases and, as a result, yields move down. Investors are seeking safe investments and settling for lower potential returns.
The 3% threshold
In August 2018, there was market concern as the 10-year Treasury yield approached 3% . This was more a psychological barrier than a realistic one since rates were still historically low. Bears point out that rising rates negatively impact the debt-servicing costs for corporations. Bulls argue that strong earnings growth and a stable economy can support modest rate hikes.
Rising rates and the S&P 500
The theory that rising rates will cause a decline in the stock market is not confirmed by historical data. Overall, stocks tend to perform well during periods of rising rates:
During periods of rising rates (brown fields), the average rise was 1.5%. The average change in the S&P 500 during those time frames averaged to 9.5% (yellow fields) There was a positive correlation 100% of the time. This positive correlation seems to break down when rates approach 5%.
Chart of 10-year Treasury Bond yields
The red line in the chart shows the 5% threshold.
When interest rates for the 10-year Treasury (blue line) rises above 5%, market (green line) decline is more of a factor as highlighted with the red arrows.
The 10-year Treasury Bond yield is a key market indicator. Historical data shows that the stock market will not be negatively impacted as long as rates remain historically low.
March 8th stock report
*** PLEASE NOTE: The stock report for the week ending March 8th will be published on Monday March 11th, later than usual due to vacation and travel plans. Every effort will be made to post this report as early as possible.
Quinnipiac GAME Forum
International forum for college and graduate school finance majors
Alan will be hosting a free webinar for the Options Industry Council (OIC) on generating income from selling options. More information to follow.
Las Vegas Money Show
Bally’s/ Paris Hotel
12:15 – 3:15
This is a paid event hosted by The Money Show
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
I started employing the covered call writing strategy you teach in the 2nd quarter of last year. I have already realized some nice returns by employing this strategy. I finished 2018 ay 4.6% on my main IRA. I thought that was decent compared to the S&P being down 6-7%.
Thanks for all you do for all of us do-it-your-selfers!
This week’s economic news of importance:
- Home builders index Feb. 62 (58 last)
- Weekly jobless claims 2/16 216,000 (229,000 expected)
- Durable goods orders Dec. 1.2% (1.4% expected)
- Philly Fed Feb. -4.1 (17.0 last)
- Markit manufacturing PMI Feb. 53.7 (54.9 last)
- Markit services PMI Feb. 56.2 (54.2 last)
- Existing home sales Jan. 4.94 million (4.99 million last)
- Leading economic indicators Jan. -0.1% (0.0% last)
THE WEEK AHEAD
Mon Feb. 25th
- Chicago Fed national activity index
- Wholesale inventories Dec.
Tue Feb. 26th
- Housing starts Dec.
- Building permits Dec.
- Case-Shiller price index Dec.
- Consumer confidence index Feb.
- New home sales Jan.
Wed Feb 27th
- Durable goods orders Jan.
- Pending home sales index Jan.
- Factory orders Dec.
Thu Feb 28th
- Weekly jobless claims 2/23
- GDP Q4
- Chicago PMI Feb.
- Personal income Dec. and Jan.
- Consumer spending Dec. and Jan.
- Core inflation Dec. and Jan.
- Markit manufacturing Feb.
- ISM manufacturing index Feb.
- Construction spending Jan.
- Consumer sentiment index Feb.
Fri March 1st
- None scheduled
For the week, the S&P 500 moved up 0.62% for a year-to-date return of 11.40%
IBD: Market in confirmed uptrend
GMI: 6/6- Bullish signal since market close of January 31, 2019
BCI: I am favoring out-of-the-money strikes 2-to-1 compared to in-the-money strikes.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a greatly improving market tone. In the past six months, the S&P 500 down 2% while the VIX (13.51) moved up by 9%.
Wishing you the best in investing,
Alan and the BCI team