The mood in markets isn’t good today but there is some good news below the surface for stock markets and gold.
Treasury yields are down 12-14 basis points across the curve as the market gorws increasingly confident that the Fed won’t hike rates next week or be overly hawkish. At the 10-year tenure, yields are down 13.5 basis points and nearing the key 5% level.
That’s a substantial decline from a high of 5.34% earlies this month, in what was a post-financial crisis high.
The negative take on the drop in yields is that the tide is going out on the AI trade and investors are seeking safety. That’s certainly a consideration strictly in terms of the AI trade. On the other side, there’s a large part of the economy that’s not AI or particularly vulnerable to AI investment. If the Treasury market is sniffing out a lower-inflation environment, or a less-profilgate Washington, then it would benefit things like home builders.
Not surprisingly, the XHB home builder ETF is up 3% today.
Along those lines, the Russell 2000 jumped earlier this week and even on an ugly day like today in the Nasdaq (-2.4%), it’s down just 0.3% today.
Obviously, the catalysts for a deeper fall in rates could be peace in Ukraine, Iran or Saudi Arabia. Better yet, the combination of all three.
Technically, the drop below 5% is the key line now. It would actually be worrisome if yields continue to fall at a rapid pace in the abscence of positive news on inflation.
Here is BMO’s take:
The health of corporate credit markets has been in focus as investors remain on guard for emerging signs of stress in the financial system and broader economy. Most immediately relevant, tech bonds have come under pressure, and the rise in credit default swaps on AI-related issuers has been weighing on risk sentiment. While the emerging signs of credit stress have yet to spill over into the broader economy or financial conditions, they have contributed to safe-haven demand for Treasuries, particularly in the long-end.
So it’s the right move, but for the wrong reasons.
This article was written by Adam Button at investinglive.com.