Bond Market Sizzles – by Justin Vaughn

(Justin Vaughn, Editor, Options Trading Report)

Last week finished on a ‘sour note,’ as the high techs lost steam on Friday, jolting the indexes lower. The Dow Jones Industrial Average lost 289 points while the S&P 500 and Nasdaq Composite declined slightly, 1.2% and 1.6% respectively; (for the week the Dow Jones was positive). As the market opened Monday, the bond market swept stocks aside, as Treasuries were ‘supreme,’ hitting a 16 year high, attracting a great deal of attention. Heavy inflows of capital left stocks fighting to stay even. Indexes were near even, slightly down. The 10-year Treasury closed at 4.366%, up from 4.1318, and the two-year yield was up to 5.109%. As the Fed waits-in-the-wings (deciding what to do), and with Treasuries showing such strength, investors and traders are stymied on the sideline looking for ‘reasons’ to jump back in. “Cash is sexy again,” said Stephanie Pierce, chief executive officer of Dreyfus Mellon and Exchange traded funds at BNY Mellon investment management. “It’s giving other asset classes a run for their money because of the yield you can garner on no-risk assets like money market funds.” A safe haven alternative…

On Wednesday the Fed elected not to hike interest rates, apparently satisfied the economy is responding to the many previous hikes. Mr. Powell did indicate that “another hike this year will be needed.” A majority of the board of governors (12) at their meeting suggested one more hike, while 7 members were satisfied no more hikes were needed this year. Strong influencers, the PCE (personal consumption expenditures) and the CPI ( consumer price index), both were in the acceptable range, with the PCE at $4.5%-4.6% for the first 6 months, while the CPI’s rise in August was 4.3%, down from 4.7% in July, “its lowest level since 2021,” Mr. Powell said. He added “Broadly, stronger economic activity means we have to do more with rates.”

Stocks reacted negatively Thursday as momentum built concerning the many “hawkish remarks” by the Federal Reserve, as its stance ‘to hold interest rates steady’ give little solace to the market. As prospects for a long period of higher rates come to bear, investors and traders alike are agonizing over long term market prospects and driven to ‘pull-in-their-horns’ when investing. As one might expect, the bond market rallied again, with the yield on the benchmark 10-year Treasury hitting highs not seen in 15 years. As the inflation subject heats up, the market becomes fidgety, giving little positive outlook, all negative signs for the investor.

Commercial Real Estate Values Are Getting Hammered…Falling valuations have stunned the financial world. Commercial properties including Malls, Office Buildings, Industrial Parks and larger Apartment Complexes are faced with severe declines in valuations, unable to qualify for refinancing. Regional and Community Banks, holders of a majority of Commercial paper, are seeing a never-before valuation slide. And as values decline, loans are not supported by valuation, and in many cases properties do not qualify for financing. Banks are scurrying to adjust for loan losses, and property bankruptcies. “The plumbing is clogged right now,” said Scott Rechler, chief executive of real estate investor RXR. “And that is going to create a back-up that will eventually overflow on the commercial real-estate markets and on the bank system.”

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Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, WSJ “The bond market has spent most of the last two months worrying about persistent inflation and an economy that seems to be running hot, despite all the Fed rate hikes,” said Chris. “The most recent economic data does more to reinforce those fears than it does to dispel them.”

Scott Moore, a political scientist at University of Pennsylvania, and author of “China’s Next Act” a book describing the nations biotech sector, WSJ “The Chinese VC landscape (Venture Capital) is maturing very rapidly, but access to financing, particularly for early-stage biotech startups, is not at the volume or the level of sophistication as it is in the U.S.,” he added.

Jeff Allerton, head of Japanese equities at Man GLG, The discretionary investment unit of hedge fund manager Man Group, WSJ “While the rest of the world is fighting inflation and trying to slow things down, the Japanese are deliberately trying to create inflation, which we think is very positive for risk assets in Japan.”

Jerome Powell, Fed Chair, Barron’s “We are navigating by the stars under cloudy skies,” said Mr. Powell, stressing the challenge of interpreting economic data.

Tim Hayes, chief global investment strategist at Ned Davis Research, Barron’s “The current phase of the earnings cycle is a bullish influence on global equities.”