By Caitlin Ostroff and Paul Vigna
U.S. stocks were mixed Friday as equities investors tried to
digest the rapid rise in bond yields.
The Dow Jones Industrial Average fell 0.6%, while the S&P
500 gained 0.5%, and the Nasdaq Composite added 1.5%. Overseas
markets were down as well, one day after a sharp selloff in U.S.
technology stocks.
Yields on U.S. Treasurys, considered among the safest assets to
own, have been rising in recent days as money managers bet on a
rapid economic rebound. The yield on the 10-year Treasury ticked
down to 1.48% on Friday, from 1.513% on Thursday, its highest
closing level in a year.
The pace of the recent rise in bond yields, which climb when
prices fall, has tempered investors' appetite for technology
stocks. Expectations among some that inflation will climb sharply
are also prompting concern that the Federal Reserve may increase
interest rates sooner than previously anticipated, which could
potentially boost borrowing costs and weigh on economic growth.
"What has happened in recent weeks is the markets have had to
reprice expectations of the Federal Reserve's rate hikes," said
Dwyfor Evans, head of macro strategy for the Asia-Pacific region at
State Street Global Markets in Hong Kong.
He said the pickup in bond yields would have a knock-on effect
on areas such as corporate lending and mortgage rates. "That is why
equities will come under pressure here, because rising yields will
have some impact on the real [economy] and earnings might have to
slow," Mr. Evans said.
Peter Boockvar, chief investment officer at Bleakley Advisory
Group, said the Fed is left with only a few options. The central
bank can either fight the bond market by ramping up its bond
buying, abandon its dovish policies, or do nothing and hope it goes
away, he said. All options would have different ramifications for
the markets and economy, and that is making life difficult for
investors.
The rollout of Covid-19 vaccines, a fresh fiscal stimulus
package promised by President Biden, and the Federal Reserve's
pledge to keep its easy-money policies in place have buoyed
sentiment for many weeks.
But the sharp turnaround in the bond market has fueled concerns
that soaring equities valuations driven by the technology sector's
rally are now too high.
"Everything is divorced from the risk in those instruments.
Everything is mispriced," said James Athey, senior investment
manager at Aberdeen Standard Investments. "The problem is that not
every investor is a fundamental investor. Markets are increasingly
dominated by momentum, are driven by price action. The more the
price falls, the more they sell."
Fresh federal data released Friday showed that U.S. consumer
spending increased 2.4% in January after household incomes got a
boost from the latest round of stimulus checks. Investors expect
Congress to pass another fiscal aid package in the coming
weeks.
In the longer term, some investors say that the vaccines and
government spending will bolster corporate earnings, and boost
appetite for stocks.
"The fundamental picture is robust. It may even be more robust
compared with before" the vaccine rollout, said Wei Li, head of
investment strategy for BlackRock's exchange-traded fund and index
investments for Europe, Middle East and Africa. "Once the yield
levels stabilize, risk assets could still do well."
Among corporate names, Salesforce was down 4.8% after the
company delivered earnings guidance that was below expectations,
despite a strong fourth-quarter report.
Tech leaders Apple, Amazon Tesla and Facebook were all higher
Friday morning, though they remain down for the week. Tesla is down
more than 12% this week.
The ICE U.S. Dollar Index, which tracks the greenback against a
basket of currencies, rose 0.5%. Investors view the dollar as a
safe asset, and increase demand for it when the stock market
declines.
Overseas, the Stoxx Europe 600 index fell 1.1%.
In Asia, most major stock benchmarks ended the day sharply
lower. Japan's Nikkei 225 index dropped 4%, its biggest one-day
decline since April. China's CSI 300 Index, South Korea's Kospi
Composite, and Australia's S&P / ASX 200 each fell more than
2%. The Hang Seng Index retreated more than 3%.
"Given the market has already rallied over the past 10 months,
you are seeing quite a bit of profit-taking," said Ken Wong, a
portfolio manager at Eastspring Investments. Mr. Wong said rising
borrowing costs were causing some investors to unwind positions
bought using debt, while expensive valuations were also fueling
caution.
Some Asia-Pacific bond markets followed Thursday's U.S. selloff:
Australian benchmark yields rose to 1.87%, the highest since
2019.
In Japan, 10-year yields have also hit multiyear highs this
week, albeit from a low base. They stood at 0.15% by late afternoon
Friday in Tokyo. Since 2016, the Bank of Japan has kept 10-year
rates at around zero under its yield-curve control policy, though
in recent years it has permitted rates to overshoot or undershoot
by as much as 0.2 percentage points.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Paul
Vigna at paul.vigna@wsj.com
(END) Dow Jones Newswires
February 26, 2021 13:04 ET (18:04 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.