Bond Yields, Bank Stocks Sink as Cautious Fed Worries Investors -- Update
March 21 2019 - 8:09PM
Dow Jones News
By Daniel Kruger
Benchmark Treasury yields touched fresh 2019 intraday lows
Thursday, a sign the Federal Reserve's caution has boosted
investors' worries about the outlook for the global economy.
The yield on the benchmark 10-year U.S. Treasury note, a
reference for borrowing costs on everything from mortgages to
corporate debt, settled at 2.537%, unchanged from Wednesday, which
are the lowest closes since Jan. 11, 2018. It dipped as low as
2.499% in intraday trading before recovering; that was the yield's
lowest intraday level in more than a year.
One key measure of investors' economic expectations, the gap
between the yields on three-month and 10-year Treasurys, hit its
narrowest since August 2007, at 0.064 percentage point. Investors
and Fed officials closely watch the dispersion of short- and
longer-term yields, known as the yield curve, because the
three-month yield has exceeded the 10-year yield ahead of every
recession since 1975.
As yields fell and the curve flattened, investors punished bank
stocks, with Bank of America Corp., Wells Fargo & Co. and
JPMorgan Chase & Co. posting two-day declines of 3% or more.
The KBW Nasdaq Bank Index of large U.S. commercial lenders notched
a two-session decline of 4.5%.
A flatter yield curve hurts bank stocks because it narrows the
gap between what lenders pay on deposits and charge on loans, a
spread known as the net interest margin. Meanwhile, investors see
falling bank shares as a troubling sign because a thriving
financial system is considered crucial to a healthy economy.
Major U.S. stock indexes rose, underscoring how the Fed's shift
has investors struggling to reconcile solid U.S. economic data with
signs of slowdown elsewhere. The Fed's halt to interest-rate
increases has removed fears that the central bank will lift
borrowing costs until they hurt economic growth, while raising
worries that the economy is slowing on its own.
The move in yields is "a great indicator of the pressures in the
economy, " said Matt Freund, co-chief investment officer for
fixed-income at Calamos Investments.
Projections released Wednesday after the central bank's meeting
showed 11 of the 17 Fed officials who play a role in interest-rate
policy didn't think the bank would need to raise rates at all this
year, up from two in December.
Most officials now also see the Fed raising rates just one more
time in the next three years, down from an estimate of three times
in December.
The yield on the two-year Treasury note, which tends to move
with investors' expectations for central-bank policy, settled
Thursday at 2.411%, its third-lowest close of the year.
Some investors said the Fed's shift could help boost stock
prices by lowering debt costs and promoting investment, which could
lift corporate earnings.
"I'm not sure you have to reconcile the two" signals sent by
stocks and bond yields, said Richard Nackenson, who manages midcap
stocks at Neuberger Berman. "What I'm seeing is the Fed has created
a more favorable environment for earnings growth and earnings
sustainability."
And with inflation showing few signs of accelerating, lower
rates could support growth, investors said. Muted inflation helps
preserve the value of government bonds by preserving the purchasing
power of their fixed payments.
"I don't think the bond market is sending as much a recession
signal as a message that the Fed should cut rates," said Katie
Nixon, chief investment officer at Northern Trust Wealth
Management. The evolution in the central bank's approach signals
"the Fed's not going to kill this cycle," she said.
--Sam Goldfarb contributed to this article.
Write to Daniel Kruger at Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
March 21, 2019 19:54 ET (23:54 GMT)
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