According to an article published today in the Wall Street Journal:"The S&P 500 has risen every day in September and sits only 1.2% off record highs. Yet the rally comes amid the sharp rise in the benchmark 10-year Treasury yield over the past several months. Last week it flirted with 3%, a level not seen in more than two years. On Wednesday the 10-year note yielded 2.920%.
Normally rising rates aren’t an issue for stocks until the 10-year yield gets above 5%, which tends to coincide with a pickup in inflation.“But the pace at which yields head higher matters at any level,” Mr. Kleintop Chief market strategist at LPL Financial said in a note to clients earlier this week.
Even companies that haven't waded into debt markets in years are jumping in now. Last week, Starbucks Corp. sold $750 million of bonds, its first bond sale in six years. The 10-year bonds carried interest of 3.85%, much lower than the 6.25% the coffee retailer paid on similar bonds it sold in 2007.
At the same time, however, higher rates are also affecting foreign-currency exchange rates in several countries, including India and Brazil. As investors shift their bond holdings to safer and higher-yielding U.S. government debt, the value of the dollar is strengthening against trading partners.
U.S. companies exporting to Brazil and Japan and India have been hurt by 13% to 25% declines in the value of the local currencies relative to the dollar. As prices of imported goods in those countries rise, that infects the economy with inflation".
Normally rising rates aren’t an issue for stocks until the 10-year yield gets above 5%, which tends to coincide with a pickup in inflation.“But the pace at which yields head higher matters at any level,” Mr. Kleintop Chief market strategist at LPL Financial said in a note to clients earlier this week.
The good news: Mr. Kleintop forecasts the recent pickup in rates could be due for a pause, especially as Treasury yields shift to levels that typically coincide with the state of the economy.
For instance, third-quarter GDP is tracking in the range of 1.5% to 2.0%, while inflation is running between 1% and 1.5%. Combine both metrics and the recent rise in yields “places it right in the middle of the range of the ‘normal’ level for the 10-year Treasury, despite the effects of the Federal Reserve’s soon to be wound down bond-buying program,” Mr. Kleintop said. As long as interest rates don’t spike significantly from current levels, there’s little reason to think the good times in the stock market won’t continue.
After years of efforts to keep interest rates near zero to help the struggling economy, Federal Reserve Chairman Ben Bernanke in May telegraphed that the days of cheap and easy long-term credit were potentially numbered. As a result, yields on 10-year Treasury bonds—a benchmark used to set other interest rates—have shot up to 2.92% from 1.63% in four months.
A lot of companies have jumped at the chance to refinance high-interest bonds and other types of loans while the going is still good. So far this year, 54% of leveraged loans made to companies have been used to refinance debt, according to S&P Capital IQ's Leveraged Commentary & Data unit. That's up from 47% in the year-ago period.Even companies that haven't waded into debt markets in years are jumping in now. Last week, Starbucks Corp. sold $750 million of bonds, its first bond sale in six years. The 10-year bonds carried interest of 3.85%, much lower than the 6.25% the coffee retailer paid on similar bonds it sold in 2007.
At the same time, however, higher rates are also affecting foreign-currency exchange rates in several countries, including India and Brazil. As investors shift their bond holdings to safer and higher-yielding U.S. government debt, the value of the dollar is strengthening against trading partners.
U.S. companies exporting to Brazil and Japan and India have been hurt by 13% to 25% declines in the value of the local currencies relative to the dollar. As prices of imported goods in those countries rise, that infects the economy with inflation".
