Starting from April 23rd 2018, the US stock market had been trading in the negative territory and the main engine behind the move had been the rise of bond yields. The 10-year yield had reached the 3% figures three days ago, a level that was last seen back in late 2013. There were several reasons behind the move, as we will discuss in the following sentences.
Investors worried about government debt?
The debt in the United States had been rising since the crash of 2008 and now that a fiscal plan had been announced at the end of 2017, the path towards a trillion dollar deficit had been carved. As the overall debt is rising, investors want higher returns for financing it, which can already be seen. Also, as there is growing speculation on the end of the current business cycle, riskier assets face a diminishing demand.
The Dow Jones Industrial Average had lost more than 500 points as the 10Y yields had reached 3% but managed to recover some of the losses as big companies had reported better than expected earnings. This kind of moves in the stock market can be monetized and trading stocks can be easily available with trade.com. The US stock market, in particular, had been active since the start of 2018 and increase activity on both sides is expected in the following months as well.
As you can see from the chart above, the 10Y yields are finally showing signs of bottoming out. Since the 80’s yields had been going down, dropping from little above 16% to 1.3% in mid-2016. Since then, as inflationary pressures had returned, so did the yields.
With inflation edging higher that will mean the central bank will need to raise rates further, in order to prevent inflation from surging too much above 2%. Higher rates will mean companies will have to pay more in interest on loans. With harder-to-obtain credit is assumed to have a negative impact on the stock market, so the pressure could continue to mount on stocks in the future ahead. It is a hard period for central authorities as they need to find the right policy in order to secure balance in the system. It will definitely be interesting to watch what will happen. The US yields are expected to advance higher in the months ahead.