The amount of negative-yielding bonds globally have jumped 47% to more than $12 trillion this year as signs that the Federal Reserve and the European Central Bank will ease spurred a bond rally.
US stocks tumbled Thursday, dragging major indexes to their biggest declines in months, as a selloff in government bonds reverberated around the world.
The S&P 500 shed 0.8% and notched its biggest loss since June, while the yield on the 10-year U.S. Treasury note—a bedrock for global financial markets—hit its highest level in more than seven years.
The rout was a fresh reminder to investors of the nine-year bull market’s vulnerability to interest-rate shocks.
Rising bond yields can signal investors are optimistic about future prospects for growth. Yet they can also have a dark side: the recent rout in Treasurys has renewed investors’ fears that the Federal Reserve may have to raise interest rates more quickly than anticipated to keep the economy from overheating. The Fed also could tip the economy into recession if it moves too quickly.
That raises the stakes for investors as they await the Labor Department’s employment report Friday. Unexpectedly strong data could send stocks and bond prices tumbling again, investors say, raising the prospect of a deeper reckoning. That is especially true with many believing that after hitting a series of records in quick succession, U.S. stocks looked overdue for a pullback.
“A bunch of different data is suggesting we’re in a hot economy right now,” said Mike Bailey, director of research at $1 billion wealth manager FBB Capital Partners. A sudden spike in wage growth, similar to earlier this year, as well as a big jump in the consumer-price index due later this month will factor heavily into where bonds and stocks go from here, Mr. Bailey said.
“If there are higher wages, the Fed is likely to raise rates faster. In some ways, it’s worse than a trade war,” he added.
Investors retreated from risk Thursday, pushing nine of the 11 major S&P 500 sectors lower. Technology stocks and shares of other highflying growth companies were among the hardest hit in the broad index, as investors were forced to rethink the value of future earnings in a rising-rate environment.
So-called value stocks fared better, with shares of financial companies in the S&P 500 adding 0.6%.
Meanwhile, a measure of stock-market volatility, the Cboe Volatility Index, leapt 30% to its highest level since July, suggesting traders were bracing for further swings in the market.
Stocks elsewhere around the world slumped, too. The Stoxx Europe 600 shed 1.1% in its biggest one-day percentage decline since Sept. 5, while major indexes in Hong Kong and South Korea deepened their losses for the year.
Thursday’s market reverberations highlighted a recurring theme of 2018: the outperformance of the U.S. economy. That has allowed U.S. stocks to march higher this year even as concerns over trade tensions and less robust growth have weighed down European and Asian markets.
One of the starkest examples of the divergence is that even though 10-year German bond yields climbed Thursday, their gap with Treasurys still widened to around 2.7 percentage points, an increase of about 0.7 percentage point this year, according to Refinitiv.
The spread is a sign of “the growth-trajectory divergence,” said Robert Tipp, chief investment strategist at PGIM Fixed Income. Markets are digesting a “modest acceleration in U.S. growth and deceleration in Europe in what is already a big gap in [economic] fundamentals.”
Higher U.S. rates and optimism about the U.S. economy also pushed the dollar higher against emerging-markets currencies, which have been under pressure this year. Indonesia’s currency, the rupiah, dropped to a 20-year low Thursday, while the Indian rupee hit the latest in a string of record lows. The Turkish lira slumped 1.9% against the dollar and the Russian ruble fell 1.7%.
“The dollar has free rein now to stretch its legs and push higher,” said Gareth Berry, a foreign-exchange and rates strategist at Macquarie Bank in Singapore.
This points to further difficulties for emerging markets, analysts say. A stronger greenback makes it more expensive for countries and companies to service and repay dollar debt. Central banks have been forced to raise rates to defend currencies, making domestic borrowings costlier, too. And higher U.S. rates reduce the relative appeal of riskier assets elsewhere.
Yield-hungry investors who had proved eager to jump in and buy stocks and bonds in developing economies after previous bouts of stress have been more hesitant to do so recently, citing uncertainty about the outlook for global trade and economic turmoil in countries such as Turkey and Argentina.
Bank Indonesia said it intervened to stabilize the rupiah by selling dollars on Wednesday. It already has lifted its benchmark rate five times since May in a bid to attract foreign cash. - WSJ
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