On March 26, 2015, the U.S. Bureau of Engraving and Printing in Washington inspects a bundle of former President Abraham Lincoln’s $ 5 bill. REUTERS / Gary Cameron / Files

August 6, 2021

David Randall, Saqib Iqbal Ahmed, Lewis Krauskopf

New York (Reuters) – Surprisingly strong hires in July bolster the case of investors who believe Treasury yields will be higher for the rest of the year, pushing the equity rally to record highs. It might put pressure on you.

The benchmark 10-year Treasury yield, inversely proportional to price, was around 1.29% on Friday, the highest level since July 27, after Labor data showed last month that the U.S. economy had created 943,000 jobs. .. Analysts polled by Reuters predict that wages will add 870,000 jobs.

Some investors say the Federal Reserve, faced with high inflation and strong growth, may need to trigger its super-simple monetary policy sooner than expected. I believe we can support it. Such results can increase returns while reducing growth stocks and other sectors of the market.

But that view is complicated by concerns about increasing COVID-19 cases across the United States, which could put pressure on growth, and the Fed’s assertion that the current inflationary surge is temporary.

Either way, the data could draw investors’ attention to this month’s Central Bank Symposium in Jackson Hall, Wyoming. It could also increase interest in the Fed’s policy meeting next month, as investors contemplate it as the central bank outlines plans to cancel its monthly asset purchases.

Simon Harvey, senior Forex market analyst at Monex Europe, said the data “provides some direction to the market.” “This will bring the next Jackson Hole event and the Fed’s September event to life.”

Higher yields can have some impact on tech and growth stocks with high valuations, as rising interest rates undermine the value of long-term cash flows. Since yields started falling in March, these stocks have rallied and helped lift the market as a whole. For example, five tech or tech-related names from Apple, Microsoft, Amazon, Google’s Parent Alphabet, and Facebook alone account for over 22% of the S&P 500’s weight.

Higher returns can also make so-called value stocks more attractive. Shares of banks, energy companies and other economically sensitive companies soared earlier this year, but have struggled in recent months.

The Russell 1000 Growth Index has risen around 18% since the end of March, compared with a corresponding 6% increase in the value index.

Art Hogan, chief market strategist at National Securities in New York City, said strong economic data boosting returns could pave the way for investors to move from growing companies to a more economically sensitive cycle.

However, strong data can make dollar-denominated assets more attractive to yield-seeking investors and push the US dollar up. A stronger dollar could be a headwind for US exporters as it reduces the competitiveness of products abroad, while damaging the balance sheets of domestic multinationals that must convert foreign revenues into dollars. there are.

The dollar index rose 0.6% on Friday afternoon and is on track for the biggest rise since mid-June.

Goldman Sachs, BofA Global Research and BlackRock are one of the companies that said yields will hit nearly 2% by the end of the year. This could accelerate if the boom prompts the Federal Reserve to abandon its super-simple monetary policy sooner. More than planned. Other banks like HSBC are looking for yields below current levels.

“I think the rally in long-term Treasury yields over the past week is a sign for the future,” a Capital Economics analyst said in a note released Friday.

“We believe that US growth will be very strong over the next few quarters and that the recent spike in inflation will continue more than expected,” the company said.

(Reported by David Randall, Saqib Ahmed, Lewis Krauskopf, edited by Ira Iosebashvili and Leslie Adler)

Analysis: where are the returns going? Investors Assess US Employment Data and Delta Concerns

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