Bonds Relentlessly Stalk the Stock Market

Again today, the Dow plunged (down another 300 points) because the bond vigilantes took the 10YR bond yield up to where it finally cleared the ominous 5% line of demarcation. This is the interest level that many say is critical to the entire economy. Thar be dragons!

Stocks in the stockade

The yield on the benchmark 10-year Treasury crossed 5% for the first time in 16 years on Thursday, a level that could ripple through the economy by raising rates on mortgages, credit cards, auto loans and more. Not to mention, it offers investors an attractive alternative to stocks.

In terms of sentiment, breaking the 5K barrier is akin to watching the odometer on your car turn past 100,000. It’s disquieting. It gets attention. October seems to be living up to its spooky reputation of delivering unsettling surprises, especially to stock investors who were nearly convinced the bear market was far behind them.

“The stock market is watching the bond market and doesn’t like what it sees,” said David Donabedian, chief investment officer of CIBC Private Wealth Management…. “This is the primary reason the stock market has been weak….”

The 30-year U.S. Treasury yield also hit a high last seen in July 2007. Meanwhile, the 30-year fixed mortgage rate reached 8% this week, a level not seen since 2000.

And, as I’ve been warning could definitely be expected from this Big Bond Bust,

Regional banks tumbled as higher rates raised worries about the sector’s exposure to Treasury securities that are falling in value. Regions Financial led the decline after a weak earnings report, falling more than 12%.

Concerns over higher rates weighed on the market during the week. The S&P 500 lost 2.4% on the week, while the Dow slipped 1.6%. The Nasdaq shed 3.2%, notching its second straight week of losses.

So, the bond bust, now that it has breached the critical juncture I’ve been writing about this week, is strongly pulling down on stocks and especially bank stocks as investors recognize soaring Treasury yields are greatly damaging the value of bank reserves, taking us back to the risks of revisiting the events of last March.

Gold meanwhile, which I’ve recommended on a recent podcast people consider giving some respect to as a safe haven, has also breached a critical sentiment barrier by hitting $2,000. Milestones weigh heavy on the mind.

Global markets have been whipped around in recent weeks by climbing Treasury yields and growing worries about interest rates staying elevated for longer.

Somewhat meaninglessly, market mavericks noted that earnings have beat expectations on 74% of companies reporting so far. So what? Earnings always beat expectations by that big of a percentage of the companies reporting or more because companies always seriously bring down earnings expectations as the end of a clearly bad quarter approaches in order to make sure reported earnings beat expectations even if earnings were much lower than the previous quarter. It would be beyond stunning if, for once, the majority of companies reporting came in below the expectations those companies had done their best to create. (You know what the best publicists say: “Always get ahead of the bad news.”)

Regardless of how the economy is faring as measured in earnings, however, the news that matters in terms of the coming recession is the bond bust and what it is doing to stocks and housing and everything that works on credit, which is just about everything that works. For stocks, internal metrics are now crumbling under the stress bonds are placing on them:

The S&P 500 … breached the 200-day moving average — seen by some chartists as a bearish signal. Wall Street’s “fear gauge” — the VIX — hit the highest since March.

Attention deficits

It is no wonder Treasuries are suffering, given today’s news that the federal budget deficit just blew past its recent $1.5-trillion level to $1.7-trillion, leaving us with the largest budget deficit since the Covidcraze of superspending mania that created most of the force behind this inflation.

That is a 23% leap for the fiscal year 2023 over 2022, thank you Bidenomics. (Didn’t they name that bill something about being relief from inflation? Ah, yes, (had to look it up because it was so inappropriately named) — “The Inflation Reduction Act.” Whatever happened to the reduction? As I wrote yesterday, the act’s longterm effects in reducing inflation (if we ever see them) will come far too late to save us from the inflation the act is creating in the present term.

It marks a major return to ballooning deficits after back-to-back declines during President Joe Biden's first two years in office.

And that deficit spending creates inflation by borrowing money from the future to build infrastructure projects today.

And that deficit will get worse:

The deficit comes as Biden is asking Congress for $100 billion in new foreign aid and security spending, including $60 billion for Ukraine and $14 billion for Israel, along with funding for U.S. border security and the Indo-Pacific region.

This attention-grabbing deficit does give the flailing Republicans something to work with, not that they ever cared about it whenever they were in power and could have actually one something about it:

The big deficit, which exceeded all pre-COVID deficits, including those brought about by Republican tax cuts passed under Donald Trump and from the financial crisis years [starting under Bush], is likely to enflame Biden's fiscal battles with Republicans in the House of Representatives, whose demands for spending cuts pushed the U.S. to the brink of default in early June over the debt ceiling.

There was never a chance of default, but there was a chance of a credit downgrade, which we got along the way. Moreover, Biden’s deficit would have been much worse for another big reason, except the courts blocked it:

The fiscal 2023 deficit would have been $321 billion larger, but was reduced by this amount because the Supreme Court struck down Biden's student loan forgiveness program as unconstitutional.

Where zombies go to die

So far the stock market’s decline has been orderly, but it is looking spooked like a bunch of school kids walking alone past a graveyard at midnight. The bad news in bond world, on the other hand, is spreading out insidiously beyond Treasuries like a creeping black fog as could be expected:

US corporate debt markets are showing early signs of weakening as rising yields and falling equities take their toll….

In the junk-bond market, where yields have climbed to their highest in a year, some companies are having a more challenging time selling debt.

This is where the zombies collapse.

The selloff in Treasuries has spilled over to all corners of corporate credit. Treasury yields rose to the highest levels since at least 16 years this week … after stronger-than-expected retail sales data stoked concerns that the Federal Reserve has more work to do in slowing inflation….

“The spreads in investment grade are not screaming buy but the yield picture is a once in a lifetime opportunity.”

What does that mean? If yields are a once-in-a-lifetime opportunity, why are investment-grade bonds not a buy? Because yields are sure to go higher still in short order? Apparently, because …

This may not be good news for issuers, at least while rates volatility persists. Some of the bonds sold this week from the likes of Wells Fargo & Co., Goldman Sachs Group Inc. and JPMorgan Chase & Co. were trading wider than where they priced by Friday, indicating that issuers coming forward next week may have to offer bigger concessions. Other issuers in the leveraged loan market have also had to sweeten terms to be able to borrow.

And here is some cheery news, not just for the zombie corporations that don’t make enough money to service their existing debts, but for many other corporations:

Even with the volatility, companies are still going to have to refinance in a market with higher rates. The amount of junk bonds maturing in the next 18 to 36 months is at the highest level since 2007, according to strategists at Goldman Sachs.

So, the Big Bond Bust started showing its teeth in a big way this week. And that’s the way it is in The Daily Doom, which gave you today’s news weeks ago, so you could be ready for it.