The situation in US markets for investors is currently a tricky one. Treasuries are offering yields well above the 4% mark, thus drawing in piles of cash that would otherwise have gone into equities. The stock market was already having its problems in the form of a major lull in the second quarter. But since then, shares have been on an upward trend until the latest fed actions that sent bond yields soaring. What should individuals know about the situation that’s taking shape in the final quarter of 2023? There are multiple moving pieces to the financial and investment puzzle, so it’s essential to take a big-picture look at the scene.
Federal Treasury Bonds Are Strong & Getting Stronger
Risk assets, like standard corporate stocks, cryptocurrency baskets, and ETFs (exchange traded funds), have been enjoying a relatively solid year. The question for fund managers and individual investors is whether the recent rise in federal treasury bond yields will dampen a stock rally that was taking shape through early August. The problem is that equities and cryptos like bitcoin are much riskier than virtually risk-free government bonds. So, when the recent 10-year Treasuries bounced up to the 4.36% yield level, those holding lots of stocks started planning a switch to the safer asset class.
With recent news that the economy is on stable ground, at least for the next several months, many investors are starting to assume that the Fed will let rates stay where they are or perhaps go higher. According to reporting from AvaTrade, it’s possible that US bond yields will continue to rise to the point where they break records for the recent 15-year period. So far, 2023 has been an unusual year because both stocks and federal bond yields have risen. Usually, the two travel in opposite directions.
Stocks Are Jittery But Stable
What’s happened recently that has share enthusiasts on edge and causing them to possibly move more of their capital into Treasuries? Inside the span of a single month, August, the benchmark S&P index dropped by a full 4% while the yield on 10-year Treasuries soared to its highest mark in more than 15 years, topping out at a robust 4.366%. Across the board, equities and their most popular sector funds are beginning to drop like lead balloons. One prime example is the tech niche, which fell 5.7%. Likewise, crypto leader Bitcoin descended by 10%.
Rebounding Economy Could Help Everyone
Amid the chaos, volatility, and power performances by federal bonds, the equities are holding their own. In late August, the market managed to eke out a .7% rise, even in the face of improving bond yields. It’s possible that the economy is performing strongly in the second half of 2023 that both bondholders and share enthusiasts can come out ahead.
Capital Moving From Riskier to Safer Asset Classes
REITs (real estate investment trusts), as well as small cap shares and emerging market equities could be the hardest hit classes as more people and institutions choose assets that are not reliant on debt. When rates are in a state of upward movement, as they currently are, capital tends to flow away from riskier areas and toward those like bonds. For the balance of the year and perhaps into 2024, anyone who needs to borrow money to conduct their business could suffer the fate of historically high rates and tighter capital markets.
Anything Could Happen
If recent history has taught investors anything, it has delivered the lesson that the economy can turn on a dime, especially in inflationary environments and during periods when global political strife is part of the scenario. Amid US inflation, the ongoing Russia-Ukraine war, and a never-ending worldwide supply chain problem, there are no guarantees that federal manipulation of interest rates will continue in the current direction. But even if it does, the equity market’s bottom could crack at any moment if more and more money begins to flow away from classes like cryptocurrency and into 10-year Treasuries.
Wide Diversification is Still a Wise Strategy
What’s the likely endgame for individuals who make annual changes to their portfolios? In many cases, diversification will continue to be the wise path for those who wish to take advantage of the highest bond yields in recent history and a still solid shares market. Specific balance percentages are a personal choice that should be based on a person’s risk tolerance and need for a specific annual return. However, if inflation continues unabated for the next year, the current bond yields might not seem so high.
