Equity markets remained volatile last week. Extremely positive vaccine news failed to offset the impact of surging bond yields. As a result, equities fell to multi-week lows in one of the most volatile weeks of 2021.
Although central bankers are maintaining their commitment to keep rates low, investors have been selling long-term bond holdings, reducing prices, and increasing yields.
The rise in the 10- year Treasury yields that has occurred over the past two weeks has been unexpected, which is the main cause of concern. Why Are Bond Yields increasing and causing stocks to decline?
First, as mentioned above, investors are selling bonds causing their price to fall and their yield to increase.
Second, yields are increasing because the market is now anticipating a significant increase in economic growth, which is typically not conducive to keeping yields low. Vaccine news continues to trend positive and cases and hospitalizations are declining, leading investors to expect a rebound in economic activity and growth.
Third, the market is anticipating an increase inflation, which likewise does not correlate with low yields. Part of the inflation expectations have to do with the next stimulus package being negotiated. While the prospect of a new fiscal stimulus package being passed by Congress was previously a catalyst for higher equity prices, things have changed as investors digest the total amount of needed borrowing by the US government should this pass. There is concern this extra borrowing could help fuel inflation.
We will continue to monitor this situation and keep you informed.
Thanks, and enjoy the rest of your week,
Dennis P. Barba, Jr.
President & Managing Partner
Important Disclosures: Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Past performance is no guarantee of future results. Wells Fargo Advisors Financial Network is not a tax or legal advisor. Be sure to consult with your own tax and legal advisors before taking any action that may have tax or legal consequences. CAR-0321-00088