Stock market books worst day of 2023 as rising yields contribute to ‘perfect storm’

Rising Treasury yields appeared Tuesday to finally catch up with a previously resilient stock market, leaving the Dow Jones Industrial Average and other major indexes with their worst day so far of 2023.

“Yields are popping across the curve…This time it seems, market rates are playing catch up with fed funds,” said veteran technical analyst Mark Arbeter, president of Arbeter Investments, in a note. Typically, market rates tend to lead the way, he observed.

Since the beginning of the month, traders in fed-funds futures have priced in a more aggressive Federal Reserve after initially doubting the central bank would hit its forecast for a peak fed-funds rate above 5%. A few traders are now even pricing in the outside possibility of a peak rate near 6%.

The yield on the 2-year Treasury note
jumped 10.8 basis points to 4.729%, its highest finish to a U.S. session since July 24, 2007. The 10-year Treasury yield
climbed 12.6 basis points to 3.953%, its highest since Nov. 9.

“At this point, the bond market has all but abandoned optimistic expectations for limited further hikes and a series of rate cuts in the back half of 2023,” said Daniel Berkowitz, investment director for Prudent Management Associates, in emailed comments.

Meanwhile, the U.S. dollar has also rallied, with the ICE U.S. Dollar Index adding 0.2% to a February bounce. Arbeter also noted that breadth indicators, a measure of how many stocks are participating in a rally, had previously deteriorated, with some measures reaching oversold levels.

“Just another perfect storm against the equity markets in the short term,” Arbeter wrote.

Rising yields can be a negative for stocks, increasing borrowing costs. More important, higher Treasury yields mean that the present value of future profits and cash flow are discounted more heavily. That can weigh heavily on tech and other so-called growth stocks whose valuations are based on earnings far into the future. Those…


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