The rise in yields of US long-term securities and its effects on the stock markets: causes and possible consequences

The rise in yields of US long-term securities and its effects on the stock markets: causes and possible consequences

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According to a report by finanzmarktwelt.de, various factors have impacted global stock markets in the last three months. These include, among other things, an increase in oil prices of over 30 percent by September, a rebound in the US inflation rate CPI, a stronger dollar and a conflict in the Middle East with the potential for escalation. What is particularly problematic for the stock markets, however, is the rapid rise in capital market interest rates at the long end, which is putting pressure on dividend stocks.

The yield on the 10-year US Treasury bond exceeded the important 5 percent mark before the market yesterday, but fell sharply during the trading day. This caused a bit of a rollercoaster ride on the stock markets. The question arises as to what caused this development and what possible consequences it could have.

A crucial connection between the yield on ten-year US government bonds and the movement of the stock markets (S&P 500, Nasdaq, Russell 2000) became apparent in September at the latest. Each further increase in the benchmark led to an extension of the correction in the markets. The competition from bonds to stocks became ever stronger and the burden on the US economy increased because almost every consumer loan is tied to this return.

The reason for the increase in yields lies primarily in the government's fiscal measures, which have led to an explosion in debt. Government spending will continue to rise in the coming years, meaning more and more tax money will have to be spent on debt service. Although there are signs of a coming recession, there has been no flight to safety, which would have been tantamount to buying long-dated government bonds. On the contrary, investors demand more returns for longer terms. This sends a signal to the Federal Reserve and the US government that a change in debt policy is necessary.

Some major investors and hedge fund managers, such as Ray Dalio, Jamie Dimon and Bill Ackman, had already bet on rising returns and thus made large profits. However, Ackman recently closed his positions and flagged a risk of recession. This led to a countermovement in the bond markets. The question arises as to whether this is the starting signal for a significant countermovement or just a short-term flash in the pan.

The current risk factors are making investors cautious; many have massive short positions in long-term bonds. Therefore, often only a small cause is enough to trigger a violent countermovement. It remains to be seen whether this is actually the start of a countermovement or just a short-term effect.

Source: According to a report from finanzmarktwelt.de