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Treasury yields continued their march higher on Wednesday, with the 10-year Treasury reaching 4.9% for the first time since 2007 in a move that sent stocks lower.
And while market history suggests stocks should rally into year-end, the continued sell-off in bonds is threatening to destabilize what’s so far been a strong year for equity markets.
As investors sell bonds, prices fall and yields rise. And as this year’s sell-off in the bond market deepens, the approach towards a big, round number like 5% for the 10-year yields can serve as a psychological magnet for investors, much the same way Dow 30,000 offered a gravitational pull for investors back in 2020.
But it’s not so much the absolute level that shakes markets as it is the speed of the change in prices and rates.
That’s because bonds are expected to be the boring, stable part of a portfolio that doesn’t move much. After all, Treasury bills, notes, and bonds are considered “risk free.”
Except a lack of worry the US government will pay you back isn’t the same as expecting the value of these securities to hold steady over time. A lesson investors are relearning during the Federal Reserve’s rate-hiking cycle.
Moreover, this move in the Treasury market comes as the stock market’s rally remains hyper-focused on a few key stocks known now as the “Magnificent Seven.”
In a note on Wednesday, Torsten Sløk, chief economist at Apollo, noted the price-to-earnings (P/E) ratio for the S&P 493 — which excludes Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA) — has been steady at around 19 all year. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
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For this smaller group of stocks, however, their collective P/E has risen more than 50%, to 45 from 29. In other words, investors aren’t actually more excited about the prospects for most companies, just for a few.
“What is particularly remarkable is that the…
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