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- Stock traders are very leery of this recent rise in rates
Stock traders are very leery of this recent rise in rates
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Loading...Rates are rising all over the world. In the last couple of weeks, the U.S. 10-year yield has risen to an eight-week high, Germany's 10-year bonds are at 18-month highs, Japan's are at five-month highs, France'sat seven-month highs.
It's moving stocks. Banks are on the rise. The main bank ETF is at the highest level since March. Interest rate sensitive sectors like real estate investment trusts have been lower.
What's going on? Investors are trying to get ahead of a change in central bank policies around the world. We have had 10 years of unconventional policies that are slowly coming to an end. The Fed is already raising rates, and while neither the Japanese nor the ECB are raising rates, it's clear they are considering reversing their policies of buying bonds and stocks, in the case of Japan.
Is this a recipe for disaster? Not at this pace, but it's being watched carefully. The rise is not very great. Even the 10-year at 2.38 percent is only 20 basis points higher than a few weeks ago. That's a very modest rise.
It's true, nobody is raising rates aggressively. This move is in anticipation of something more aggressive happening. The Fed minutes, released Wednesday, clearly indicated the Fed is not wedded to an aggressive rate hike schedule. And what about those who say raising rates, even if modestly, when the economy is only fair is a bad idea? Is 2.25 percent GDP growth great? Not really. But it's better than the 1.75 percent we've seen recently. And European growth prospects certainly have improved.
The risk is rates moving more aggressively. What might cause that to happen? Notably better U.S. economic data, which we don't have. There is still a split between the "hard" and "soft" data. For example, ISM services and ISM manufacturing—which is soft data—for June were both good. But the harder data—Durable Goods, Retail Sales, auto sales—have not been that great.
Inflation, the other factor that would cause the Fed to hike more aggressively, also is not there yet.
Source: Bloomberg
Junior Trader Stefan Panteleev
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