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Bond Market Turmoil and the S&P 500

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Are interest rates on long term bonds rising because of expectations of post-Coronavirus Recession growth? Or are they rising because the specter of inflation is becoming a real problem?

The as yet unknown answers to these questions is having an effect on the U.S. stock market, because bond investors have hedged their bets on bond yields over the past year by buying up high-flying tech stocks. For them, rising interest rates on bonds means losses, which they can and have offset by selling their tech-heavy stock holdings.

That dynamic helps explain why the tech-heavy Nasdaq has born the brunt of recent drops in stock prices in recent weeks, where the S&P 500 (Index: SPX) has been affected because of where the index overlaps those stocks. As you can see in the latest update to the alternative futures chart, the S&P 500 has generally risen along with the stocks that will benefit most from a post-Coronavirus Recession recovery.

Alternative Futures - S&P 500 - 2021Q1 - Standard Model (m=+1.5 from 22 September 2020) - Snapshot on 19 Mar 2021

The Federal Reserve, for its part, announced on Wednesday, 17 March 2021 that it would keep the short-term interest rates it controls at or near the zero level, indicating they are willing to allow inflation room to rise. On paper, setting that expectation should boost tech stocks, which is what happened after the Fed’s meeting.

But the Fed isn’t the only institution whose policies affect interest rates. On Friday, actions by the U.S. Treasury Department contributed to an environment where short term interest rates for U.S. Treasuries dropped below 0% and became negative, as President Biden’s “stimulus” spending starts to get underway, dramatically increasing the amount of money the U.S. government borrows. The Fed’s minions signaled they were comfortable with allowing interest rates become negative, which is a change from the expectations they had previously set.

The sudden arrival of negative short term interest rates and rising long term interest rates spells turmoil for the bond market, which will affect the stock market.

Meanwhile, other stuff happened during the week with market-moving potential. Here’s our summary of the headlines for those stories:

Monday, 15 March 2021
  • Signs and portents for the U.S. economy:
  • Fed minions not expected to shift monetary policy:
  • Bigger inflation developing in Brazil, bigger stimulus developing in Eurozone:
  • China economy shows rebound:
  • BOJ minions want to stop buying so many risky assets, ECB minions buying bonds:
  • S&P 500 and Dow end session at record highs
  • Tuesday, 16 March 2021
    • Signs and portents for the U.S. economy:
  • Winter storms hammer U.S. manufacturing production
  • U.S. business inventories rise moderately in January as sales surge
  • U.S. companies issue more fixed-rate debt as yields rise
  • Anxious Americans to pay debt, taxes with COVID-19 stimulus checks
  • Fed minions not expected to shift monetary policy:
  • Bigger trouble developing in Eurozone:
  • BOJ , ECB minions want ‘stably low’ yield curves
  • S&P 500 ends lower as investors eye Fed meeting
  • Wednesday, 17 March 2021
    • Signs and portents for the U.S. economy:
  • Fed minions optimistic for U.S. growth, will hold rates near 0% despite rising inflation, punt on updating bank liquidity rules:
  • Bigger trouble developing in Eurozone, Canada:
  • BOJ minions dropping ETF buys to adopt more flexible rates; ECB minions prioritize climate change over COVID recovery, but act to bail out banks:
  • Wall Street ends sharply lower, hit by bond yields and COVID-19 worries
  • Thursday, 18 March 2021
    • Signs and portents for the U.S. economy:
  • Fed minions optimistic for U.S. growth, will hold rates near 0% despite rising inflation, punt on updating bank liquidity rules:
  • Bigger trouble developing in Eurozone:
  • Wall Street ends sharply lower, hit by bond yields and COVID-19 worries
  • Friday, 19 March 2021
    • Daily signs and portents for the U.S. economy:
  • Fed minions tighten monetary policy, say optimism and not rising inflation expectations behind rising rates, plead guilty to a data heist:
  • Former U.S. Fed employee pleads guilty to stealing bank stress test data
  • Bigger inflation developing in Russia, bigger debt-funded stimulus in Eurozone:
  • BOJ minions to let bond interest rates float more:
  • ECB minions to drag out digital currency development:
  • Wall Street ends mixed as Treasury yields pause
  • Did we catch all the news that mattered to the market? If you are looking for another view of the news of the week that was, check out Barry Ritholtz’ list of positives and negatives he found in the past week’s markets and economics news.




    Source: https://politicalcalculations.blogspot.com/2021/03/bond-market-turmoil-and-s-500.html


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