Why Rising Yields Could Crush Stocks
When yields spike fast, $SPDR S&P 500 ETF Trust(SPY)$ can crash 20% in 1 day.
6 things are pushing yields up at once. In plain terms:
1. Inflation won't fully die. University of Michigan year ahead inflation expectations rose again in August, a 5th straight month above 4%. Not good when prices are rising!
2. The government is borrowing way more than expected. The CBO just raised its deficit estimate to $2.1 trillion, $200 billion above February's figure. Total federal debt is near $39.8 trillion, and the annual interest bill now exceeds what Washington spends on Medicare or the military.
3. Oil. The Iran-Oman talks over the Strait of Hormuz have traders watching energy prices, and expensive oil feeds straight into inflation.
4. Nobody knows what Warsh's Fed will do. The Fed held at 3.50–3.75% in July but sounded hawkish, with three officials dissenting in favor of a hike. Warsh then signaled a rate hike may not be his preferred tool against inflation, which sent long-dated yields surging. If the Fed won't fight inflation with hikes, the bond market prices it in itself.
5. Japan might sell. Traders worry Japan could dump some of its large reserves to defend a weak yen. Japan is one of the biggest foreign holders of US debt.
6. The AI buildout is competing for the same money. Tech giants have issued enormous amounts of corporate debt to fund data centers, and some (Microsoft included) carry better credit ratings than the US government. Investors are buying those instead of Treasuries.
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