Analysis: Where are the yields going?Investors Weigh US Employment Data and Delta Concerns

On March 26, 2015, the US Bureau of Engraving and Printing in Washington inspects a packet of former President Abraham Lincoln’s $ 5 bill. REUTERS / Gary Cameron / Files

August 6, 2021

David Randall, Saqib Iqbal Ahmed, Lewis Krauskopf

New York (Reuters) – Unexpectedly strong hiring in July boosts the case of investors who believe Treasury yields will be higher for the rest of the year, pushing stock rally to record highs It may put pressure on you.

Benchmark 10-year Treasury yield, which is inversely proportional to price, was around 1.29% on Friday, the highest level since July 27, after Labor data showed last month that the U.S. economy added 943,000 jobs. .. Analysts polled by Reuters predict salaries to add 870,000 jobs.

Some investors say that the Federal Reserve, which faces strong inflation and strong growth, may need to unleash its ultra-simple monetary policy sooner than expected. I believe we may support it. Such results can boost yields while squeezing growth stocks and other areas of the market.

But that view is complicated by concerns about the rise in COVID-19 cases across the United States, which could put pressure on growth, and the Fed’s claim that the current inflation surge is temporary.

In any case, the data could raise investor attention to this month’s Central Bank Symposium in Jackson Hall, Wyoming. It could also increase the interests of the Fed’s policy meeting next month as investors consider it as the central bank outlines its plans to roll back its monthly asset purchases.

Simon Harvey, Senior Forex Market Analyst at Monex Europe, said the data “provides some direction to the market.” “This will bring the upcoming Jackson Hole event and the Fed event in September to live.”

Higher yields can have some impact on tech and growth stocks with high valuations, as rising interest rates undermine the value of long-term cash flow. Since yields began to decline in March, these stocks have recovered and helped lift the broader market. For example, five tech or tech-related names from Apple, Microsoft, Amazon, Google’s parent Alphabet, and Facebook alone make up more than 22% of the weight of the S & P 500.

Higher yields can also make so-called value stocks more attractive. Stocks in banks, energy companies and other economically sensitive companies soared earlier this year, but have struggled in the last few months.

The Russell 1000 Growth Index has risen about 18% since late March, compared to a corresponding 6% increase in the Value Index.

Art Hogan, chief market strategist at National Securities in New York, said strong economic data boosting yields could pave the way for investors to move from growing companies to a more economically sensitive cycle.

However, strong data can make dollar-denominated assets more attractive to yield-seeking investors and push up the US currency. A stronger dollar could be a headwind for U.S. exporters as it reduces the competitiveness of products abroad, while damaging the balance sheets of domestic multinationals that have to convert foreign earnings into dollars. there is.

The dollar index rose 0.6% on Friday afternoon trading and is on track for the largest rise since mid-June.

Goldman Sachs, BofA Global Research and BlackRock are one of the companies that said yields would rise to nearly 2% by the end of the year. This could be accelerated if the boom started the Federal Reserve Board to unwind super-simple monetary policy early. More than expected. Other banks like HSBC are looking for yields below current levels.

“I think the long-term Treasury yield recovery in the past week or so is a sign of the future,” an analyst at Capital Economics said in a memo released Friday.

“We believe US growth will be very strong in the coming quarters and the recent surge in inflation will continue more than expected,” the company said.

(Reported by David Randall, Saqib Ahmed, Lewis Krauskopf, edited by Ira Iosebashvili and Leslie Adler)