Bond traders are taking action again, pushing U.S. Treasury yields higher and signaling that the Federal Reserve was too harsh when it cut interest rates by half a percentage point last month. Rising yields of late have put pressure on the stock market, particularly the real estate-related stocks in our portfolios. The 10-year Treasury yield, which affects a variety of consumer loans including mortgage rates, rose again on Wednesday, reaching a session high of 4.26%. This is a level not seen since late July, when yields began to move lower in anticipation of a rate cut by the Federal Reserve on September 18. At the shorter end of the yield curve, the two-year chart follows a similar pattern. US10Y US2Y 3M mountain three-month performance The hope when the Fed began cutting interest rates was that short-term Treasuries would fall faster than long-term Treasuries, providing relief to borrowers and investors. This is not a recent occurrence. Two-year and 10-year Treasury yields have recently moved higher together. Interest rates are like the gravitational pull of stocks—the higher they are, the more competition there is for investment funds. Compared with the volatility of stocks, rising risk-free government bond yields have become an attractive way to earn compensation. Rising 10-year Treasury yields also prevented mortgage rates from easing. The average 30-year fixed-rate mortgage has risen for three weeks in a row, although it is down more than 1 percentage point from a year ago. In Freddie Mac’s latest weekly survey, the 30-year fixed rate was at 6.44%. The Fed’s interest rate cuts represent an easing of monetary policy, which makes it faster and easier for the economy to grow and makes debt more affordable. The downside to these dynamics is that a warming economy also increases the likelihood of rekindling inflation, which has already begun to slow. Bond traders are concerned about a resurgence in inflation as economic data has been strengthening since central bank governors met in September. According to the CME Group’s FedWatch tool, the market is basically locked in the possibility of the Federal Reserve cutting interest rates by 25 basis points next month. But since then, a rate cut in December has become less likely. However, a troublesome rebound in inflation is not what we are calling for, nor is it the basis for our club’s investment decisions. Another driver for higher bond yields is concerns about the national debt and trade deficit under the new presidential administration. Whether rising yields are a bet on next month’s election or reflect the view that fiscal policy will remain accommodative no matter who wins is anyone’s guess. The two presidential candidates do seem to agree on one thing: the cost of living is too high. One of the unavoidable items on consumer balance sheets is housing costs, which have been one of the trickiest areas for inflation. To bring home prices down, we need more housing supply and lower mortgage rates to incentivize builders and incentivize sellers and buyers. With mortgage rates at historic lows, many would-be sellers are reluctant to move, causing home prices to rise. In addition to rising mortgage rates, potential buyers are unwilling to pay higher home prices. Increased housing formation based on the Fed’s rate cuts is key to three stocks in our Investment Club portfolio: Stanley Black & Decker, Home Depot, and Best Buy. As we explained when we slightly increased our holdings on Home Depot stock on Tuesday, rising bond yields and climbing mortgage rates have delayed the benefits of the Fed’s easing policy. However, fighting the Fed ultimately proves futile in the long run – so we do expect rates to eventually fall. Additionally, the management teams at Stanley Black & Decker, Home Depot, and Best Buy are effectively executing on the things within their control. Of course, they will benefit from lower interest rates – but interest rates themselves are not the reason we hold positions. We are in this because fundamentals are improving, which will only come into further focus when interest rates come down. We believe that the rise in bond yields is unsustainable because if the Fed exerts sufficient pressure, short-term Treasury yields will inevitably fall. The longer end of the curve should then decline and provide needed relief for mortgage rates. When that happens, you’ll want to have rate-sensitive stocks on your books already. We may have arrived early. But we are ready. It would be a mistake to abandon these names now, when the Fed announces that its rate-cutting cycle has taken effect. When it became clear that 10-year Treasury yields peaked, you may have missed a large portion of the move. (Jim Cramer’s Charitable Trust Buys SWK, HD, BBY. See here for a complete list of stocks.) Subscribe as Jim Cramer’s CNBC Investing Club If you do, you will receive trade alerts before Jim Cramer trades. Jim waits 45 minutes after sending a trade alert before buying or selling stocks in his charitable trust portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing a trade alert before executing the trade. The investment club information above is subject to our Terms and Conditions and Privacy Policy and our Disclaimer. No fiduciary duty or obligation is created or created by any information you receive in connection with the Investment Club. No specific results or profits are guaranteed.
On September 17, 2024, cars drove past the Federal Reserve Building in Washington, DC.
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Bond traders are taking action again, pushing U.S. Treasury yields higher and signaling that the Federal Reserve was too harsh when it cut interest rates by half a percentage point last month. Rising yields of late have put pressure on the stock market, particularly the real estate-related stocks in our portfolios.
