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Chart of the Day / Market Panic: Don’t Fear the 10-Year

Market Panic: Don’t Fear the 10-Year

April 24, 2018

Up, down, up, down, up, down…

After multiple poor days on the market, investors were in a foul mood again yesterday, reminding us that we must always be prepared for the “what if” factor.

All thanks in part to warnings and the 10-year Treasury.

Caterpillar (CAT) for example warned that profit margins wouldn’t budge much from where they are right now.  3M (MMM) lowered its outlook on the year.  Travelers (TRV) fell after missing forecasts.  Tech investors were even less than amused when Alphabet (GOOG) announced it spent $7.7 billion in capital expenditures.

Making things a bit worse, the 10-year U.S. Treasury noted jumped above 3% for the first time in years, which raises fears that it could become a bit more expensive to borrow money for mortgages and auto loans.

However, some don’t buy into the fear that 3% on the 10-year is something to be worried about.

“I don’t know that there is any magic to the 3.0% level other than it is a nice round number,” said Jeff Mills, co-chief investment strategist for PNC Financial Services Group, as quoted by CNN. “There is no rule that says rising rates are bad for the stock market.”

Plus, according to Market Watch:

Rising yields can cause heartburn for investors. After all, U.S. government bonds are considered the world’s safest asset, which means that moves can send ripples through global financial markets.  Bears argue that a sustained rise in yields cuts against the narrative of historically low interest rates used to justify lofty equity valuations. A rise in yields also has implications for debt-servicing costs for corporations that have loaded up on leverage in response to historically low rates.  But market bulls are confident that yields would have much further to rise before tearing up a bullish backdrop of strong earnings growth and a solid economic outlook.

Unfortunately, all of this is created an insane amount of fear in the markets.

The best thing to do here is to hold our hedged bets and wait it out.  Once the fear begins to fall apart, we can jump into stocks that were beaten up in recent days.

For now, let’s sit tight.