almost 3 years ago • 2 mins
Stock markets have seen a sudden reversal of their post-pandemic pattern in recent weeks.
As investors position for strengthening economic growth and inflation they’re selling Treasuries – US government bonds – and sending the growth stocks that led 2020’s gains lower with them.
The value of these growth stocks – the likes of carmaker Tesla and exercise equipment firm Peloton – derives from hopes they’ll deliver huge profits in years to come. But if the guaranteed returns from safe assets like Treasuries rise (as falling bond prices lead to higher yields) then the appeal of Tesla et al diminishes.
In times of market stress like this, investors have come to rely on soothing words and actions from central bankers – it’s become part of the routine since the 2008 financial crisis. So when Federal Reserve Chairman Jerome Powell held a webinar on Thursday the investment world tuned in – only to be disappointed.
While Powell said he was aware that yields on Treasuries were climbing as investors sold, he failed to offer the soothing words or actions some had expected. He rather pushed the focus away from Treasuries to point out that “financial conditions” more broadly are still incredibly loose.
By “financial conditions,” Powell means gauges like this from the Chicago Fed (there are many others) that combine bond yields with measures like stock prices and the availability of short-term credit to give a broader sense of the availability of money in the economy.
As the chart above shows, while yields on 10-year Treasuries (in blue) have indeed climbed sharply, financial conditions (in pink) are yet to move and remain far below their historical average.
So don’t expect the Fed to support investors in longer-term Treasuries – or indeed those aforementioned growth stocks – unless stock markets more broadly take a tumble or consumers’ ability to borrow gets gummed up.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.