Use access key #2 to skip to page content.

inthemoneystock (< 20)

Simple Explanation: Why Rates Matter To The Stock Market

Recs

1

May 29, 2013 – Comments (4) | RELATED TICKERS: SPY , DIA , QQQ

The 10 year bond yield pushed higher again today. It is currently trading at 2.15%. So why does this matter to the stock market? Why has the stock market all of a sudden gone from a straight up move to a choppy pullback? The reasons are extremely simple and I will lay them out below.

1. When rates rise, borrowing money becomes more expensive. As interest rates rise, housing will take a hit. The Federal Reserve has made it clear they believe housing is the key to an economic recovery. If interest rates jump, less Americans will be able to afford to borrow money to buy a house. The housing market will slow and the economy will follow. The stock market senses this.

2. The 10 year yield is now at 2.15. Yesterday, it crossed the dividend yield of the S&P 500. This means it is now more profitable to buy bonds than to invest in the stock market. Considering that the stock market is extremely high and possibly due for a correction, many investors are opting for the safety of bonds which are still going to pay out more than stocks on a yield basis. In simple terms, two investments, one pays you 2.15% with little risk while the other pays you 2.00% with a lot of risk, which one do you choose? The answer is obvious and a major reason why the stock market has started to get jittery.

These are the keys to understanding why interest rates/yields matter. The Federal Reserve wants to keep rates low so housing recovers, the economy does better, and money flows into stocks. The Federal Reserve keeps rates low by printing money in the form of quantitative easing. However, they cannot print forever. The market senses this and is beginning to react.

Gareth Soloway
InTheMoneyStocks.com<

4 Comments – Post Your Own

#1) On May 29, 2013 at 6:23 PM, awallejr (85.56) wrote:

In simple terms, two investments, one pays you 2.15% with little risk while the other pays you 2.00% with a lot of risk, which one do you choose?

Little risk, what about the TB buyer who bought when they were yielding 1.64%?  And what about when you can still buy MLPS, BDCS and REITs that pay 8-15%?

Report this comment
#2) On May 29, 2013 at 8:35 PM, rd80 (98.25) wrote:

This means it is now more profitable to buy bonds than to invest in the stock market.

Couldn't disagree more.  The 10-year T-note may have crept past the S&P500 div yield, but the coupon payment on the note will stay the same until maturity, not so with the dividend payouts.  Combine that with more chance that bond yields go up than that they go down and high quality, long dated bonds have all the risk of quality, dividend paying stocks with less reward. 

Report this comment
#3) On May 30, 2013 at 11:35 AM, ElCid16 (95.62) wrote:

This means it is now more profitable to buy bonds than to invest in the stock market.

Only if you're simply looking at the yield and coupon.  If you're only looking at yields vs coupons, why aren't you looking at a dividend ETF as a fair comparison?  Why are you looking at the S&P 500?

 

Report this comment
#4) On May 30, 2013 at 11:52 AM, awallejr (85.56) wrote:

Because he is probably shorting and trying to scare people.

Report this comment

Featured Broker Partners


Advertisement