Put your money in bonds

Why is everyone talking about US bond yields? Because they may “torpedo the stockmarket”, says The Wall Street Journal. On Friday last week, fresh job data pushed the yield on the 30-year Treasury up past 5% (a psychological hurdle for the “long bond”) to 5.1%. The yield on the ten-year Treasury went up to 4.9%, its highest level since June 2002, and the Dow Jones Industrial Index lost 0.9%, closing at 11,120.04.

A total of 211,000 new jobs and an unemployment rate of 4.7% in March indicate that the labour market is moving to full employment. This has prompted investors to fear that the Federal Reserve’s widely expected May interest-rate hike from 4.75% to 5% will not necessarily be its last.

At the beginning of this year, analysts were predicting rates of 4.75% mid-year, but now they could go as high as 5.25% in June. And even if there is a pause then, towards the end of the year interest rates could go higher still.

It doesn’t matter, says Jim Paulsen of Wells Capital Management in the US. He estimates that corporate profit growth might be affected by a 6% Fed target rate, but not by 5%. Janna Sampson of OakBrook Investments is equally optimistic on long-term Treasury yields.

It was surprising that long-bond yields didn’t rise when the Federal Reserve started raising short-term rates in 2004 to cool the economy. Now they’re just “playing catch up”. “The ten-year yield would have to rise to 6% before it put a serious dampener on stocks,” says Sampson.

Strong equity returns this year add fuel to the optimists’ arguments. The Dow Jones Industrial rose 3.6% in the first quarter, the S&P 500 rose 3.5% and the Nasdaq 6.1%. Not exactly emerging-market-size returns, but impressive given rising interest rates and record oil prices, two things that have historically dragged the US market down.

What about the rest of the year? Some analysts are expecting single-digit growth; others see a further 10%-12%. Opinions on Wall Street are mixed over whether this strong first quarter is “a sign of better things to come or the best the year has to offer”, says The Business.
(MoneyWeek)