Why Rising Bond Yields May Not Be a Threat to Stocks
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What is the episode’s main question about rising bond yields and stocks?
With your money briefing, I'm J.R. Whelan at The Wall Street Journal in New York. You'd think the steep rise in bond yields as of late means we're in for a stock market downturn. Well, that may not be the case. We'll explain why in a moment. First, these money and market stories you should know. Looks like shoppers will be making a list and checking it twice this holiday season. In the latest consumer snapshot from Global Data Retail, nearly half of shoppers surveyed said they'll spend more on clothing for the holidays than they did last year. On top of that, almost two-thirds of respondents say their personal finances are in better shape compared with this time in 2017, and a little more than half say they feel good or very good about the extra expense of the holidays, with about the same saying they'll spend more on
or a lot more than last year. And the National Federation of Independent Businesses Small Business Optimism Index fell slightly in September after hitting a record high in August. And while August's report indicated small businesses were prepared to offer increased wages, finding workers appears to be a prominent challenge. In September, nearly two-thirds of survey respondents reported hiring or trying to hire, but 53% said there were few or no qualified applicants. And quality of labor was respondents' biggest business problem, followed by taxes, in spite of the 2017 tax cuts that injected optimism among business owners. But optimism rose in September surrounding the creation of jobs, sales, and capital spending.
If you ask some stock investors on Wall Street, the only thing we have to fear is rising bond yields. And while history has shown increasing bond yields could act as a harpoon for a bull market, Wall Street Journal senior markets columnist James McIntosh joins us to calm those fears and set the record for us. So James, let's just start with explaining, if you would, how steep the rise in bond yields has been over the past several weeks. It's been pretty fast, actually. I mean, it's
How are consumer holiday spending and small‑business optimism changing?
The yield's been going up all year. The 10-year's been up a lot. I mean, to put it in context, the losses so far this year, if you'd bought a 10-year bond, 10-year treasury bond, and just reinvested the coupons back into the treasury bond, you'd have lost about 6%. And the losses have, well, you have had worse years, but really not very many right back to the 1970s. It's a pretty dramatic set of losses. And it's got even worse just very recently. So last week, there was a very sharp rise in long-dated bond yields.
And what's unusual here is that the most recent rise in yields is not due to a stronger economy or necessarily higher interest rates.
Yeah, that's right. The economy has been fine, well, more than fine. The economy has been great, and clearly that was a chunk of what happened earlier in the year. But in the last week or so, the rise in yields hasn't really been about the economy getting even stronger or about people anticipating that the economy will be even stronger. Instead, it's been about rising uncertainty, which is something that shows up in what they call in the jargon the term premium, which is basically if you think that the bond yield over the next 10 years gives you the expected interest rate over the next 10 years. And then on top of that, a bit of a reward for locking up your money for 10 years to cover the uncertainty that you might be wrong about what happens to interest rates.
And that's gone up. And that's really not very good for investors. I mean, it's obviously bad for bond investors because a higher yield immediately means a lower price. But it's also worrying for everyone else because, of course, if you've got less certainty about what the outcomes might be, then You've got more risk and you ought to want a lower price. And, of course, we've seen in the stock market, you know, I mean, it's too early to say it's a break in the bull market, but we've seen some moderate losses for the market as a whole and some very hefty losses for the really high flying stocks.
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