Stocks Gain as Treasury Yields Fall

The S&P 500 has recovered from its post-Brexit losses and managed to briefly jump above an all-time record

Stocks Gain as Treasury Yields Fall

US stocks enjoyed healthy gains on Friday as investors reacted to fresh jobs data. A recent report from the US Labor Department revealed major job gains through June, indicating strength in the US economy despite global weakness. The S&P 500 recovered from its post-Brexit losses and managed to briefly jump above an all-time record, before slightly retreating later in the day. Investor clearly believe the US economy is on track to post healthy gains over the coming months. Lately investors have been fleeing both China and the European Union over debt and growth fears. Instead, investors are finding a safe haven in Japan and the US.

Stock markets weren’t the only sector to enjoy heightened investor demand. As investors run out of decent, low risk assets to purchase, many have begun buying up US government debt. The US 10-year Treasury note, one of the safest investments in the world, experienced a major increase in demand after the jobs data was released. The yield on the 10-year bond fell to 1.366 percent due to the frenzied purchases by investors. This new yield is the lowest point in US history and is a welcomed change for the US government. But the rise in both stocks and bonds is presenting an interesting pattern seldom seen before.

Generally, when the stock market rises, bond yields usually fall. When investors become concerned over growth, stocks are usually sold off because they are considered more volatile and risky. Instead investors aim for safer assets such as US government bonds. The opposite is true when investors believe an economy is stable and will grow in the coming months. If investors believe an economy is set to make major gains, stocks will rise as a consequence. However, the relative success of the US economy against the backdrop of a severely struggling global economy is presenting a two-fold pattern. US stock markets and bond markets are enjoying a rally, which is an unusual pattern indeed.

This trend presents an interesting situation for the Federal Reserve and other global central banks. Because of the weakened state of the global economy, global central banks have continued to slash interest rates while increasing monetary stimulus measures. About one-third of global bonds now boast negative interest rates, a trend that investors are not too excited about. But while the Federal Reserve has been hesitant to raise interest rates, the dual rallies of US stock exchanges and the US bond market has acted as a form of stimulus itself. The popularity of US Treasuries has sent yields on those Treasuries down significantly, providing some relief to the US government. At the same time, corporate bonds in the US are also enjoying increased demand, which has helped to pad corporate profits and make debt financing in the US easier. The effect is similar to an interest rate cut without the cut itself.

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