Bond traders are at it again, pushing Treasury yields higher and signaling the Federal Reserve was too heavy-handed when it cut interest rates by a half-percentage point last month. The recently rising yields have put pressure on the stock market — and specifically, names in our portfolio tied to housing. The 10-year Treasury yield — which influences all kinds of consumer loans, including mortgage rates — rose again Wednesday, reaching a session-high 4.26%. That’s a level not seen since late July when the yield had started to turn lower in anticipation of the Fed rate cut, which came on Sept. 18. Since then, though, the 10-year yield has been working its way higher. On the shorter end of the yield curve, the 2-year chart follows a similar pattern. US10Y US2Y 3M mountain Three month performance The hope when the Fed started cutting rates was that shorter-duration Treasurys would move lower at a greater pace than longer-dated ones, providing relief to borrowers and investors. That’s not what has been happening lately. The 2-year and 10-year yields have recently been moving higher together. Rates are like gravity for stocks — the higher the rates, the greater the competition for investment dollars. Elevated, risk-free government bond yields become an enticing way to get returns when compared to the volatility of stocks. A higher 10-year Treasury yield also halts relief on mortgage rates. The average 30-year fixed-rate mortgage, while more than 1 percentage point lower than a year ago, has moved higher three weeks in a row. In Freddie Mac’s latest weekly survey , the 30-year fixed rate was 6.44%. The Fed cutting rates represents an easing of monetary policy, which allows the economy to grow quicker and easier and makes debt more affordable. The downside of those dynamics is that a hotter economy also raises the prospects of sparking inflation again, just as it has started to moderate. Bond traders are worried about rekindling inflation because economic numbers have been coming in stronger since central bankers met in September. The market odds on a quarter-point Fed cut next month remain basically a lock, according to the CME FedWatch tool . But after that, the chances of a December cut are dwindling. A troublesome rebound in inflation, however, is not what we’re calling for, and it’s not what we’re basing the Club’s investment decisions on. Another dynamic pushing bond yields higher is concern over what happens to the national debt and trade deficit under a new presidential administration. Whether the move up in yields is a bet on next month’s election or reflects a that view that regardless of who wins, fiscal policy will remain loose, is anyone’s guess. Both presidential candidates do seem to agree on one thing: The cost of living is too high. A large, unavoidable line item on consumers’ balance sheets is housing costs, which have been one of the stickiest areas of inflation. For home prices to come down, we need more housing supply and lower mortgage rates to incentivize builders and to motivate sellers and buyers. Lots of would-be sellers are sitting on historically low mortgage rates and are reluctant to move, which drives home prices higher. Would-be buyers are reluctant to pay those higher home prices on top of elevated mortgage rates. Increased housing formation based on the Fed lowering rates is key to our investment cases for three stocks in the Club portfolio: Stanley Black & Decker , Home Depot and Best Buy . The bond yields rising and mortgage rates creeping up have pushed back the benefits of the Fed’s easing, as we explained in Tuesday’s small addition of more Home Depot shares. Ultimately, however, fighting the Fed has proved a fool’s errand in the long run — so, we do expect rates to eventually come down. In addition, the management teams at Stanley Black & Decker, Home Depot and Best Buy are executing effectively on the things within their control. Sure, they will benefit from lower rates — but rates alone are not why we own positions. We’re in them because the fundamentals are improving, which will only come further into focus when rates come down. Bottom line The rise in bond yields is not sustainable, in our view, because shorter-duration Treasury yields are bound to come down if the Fed applies enough pressure. The longer end of the curve should then come down and provide the needed relief on mortgage rates. When that happens, you will want to already have the rate-sensitive stocks on the books. We may have been early. But we’re ready. To give up on these names now, right when the Fed has broadcasted that the rate-cutting cycle is in effect, would be a mistake. By the time it becomes clear that the 10-year yield has peaked, you will likely have missed a significant part of the move. (Jim Cramer’s Charitable Trust is long SWK, HD, BBY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Bond traders are at it again, pushing Treasury yields higher and signaling the Federal Reserve was too heavy-handed when it cut interest rates by a half-percentage point last month. The recently rising yields have put pressure on the stock market — and specifically, names in our portfolio tied to housing.
