Bond yields retreat, sending stocks higher.

The equity followed through another day of rebound even though there were several headwinds in the market: a war in the Middle East, rosy economic data that spurred inflation fear and a US House of Representatives without a speaker.

Nonetheless, markets overcame odds driven largely by the decline in bond yields and several dovish comments from Federal Reserve officials. As discussed, given geopolitical tensions, investors are rushing in to buy Treasuries, which is seen as a safe haven. The result is a decline in bond yields and, thus, support of equity prices.

Impact of Rising Bond Yields

An ever-increasing bond yield tends to compete for funds against the stock markets. Investors tend to park part of their cash in bonds that give considerable yield as compared to stocks. A higher bond yield also increases borrowing costs for businesses and homeowners. That is the key reason for the decrease in corporate bond issuance.

Indeed, recent Fed officials have mentioned that the rising bond yield has helped them to do much of the monetary tightening effect since it leads to tighter financial conditions that slow the economy and spending, cooling the upward pressures on general prices.

Changing Dynamics of Economic Data

Good news is bad news for the market. This mantra has worked well. Good labour market data means a strong spending consumer base that could fuel higher inflation, leading to stocks retreat.

Now, things might have a slight tilt. The good news is that the bad news lens might slowly take a back seat as investors shift towards more optimism. Here’s the logic: stronger data could mean that the economy can weather through better in the stormy conditions of financial constraints from more interest rates, and that could spell more upside for the stocks as more market participants subscribe to this emerging view.

What’s ahead for the market?

1. We will have the PPI data, and that will be released today.
2. Then on Thursday, we have the CPI data for September. If we see a higher print, expect the bond yield to roar back and push equity prices downward.

It is 11 October, Wednesday, 9 am in Singapore and 9 pm in New York. We hope you have a splendid day at work and in school.

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