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Treasury Rout Unnerves Traders as Stocks Retreat: Markets Wrap

Treasury Rout Unnerves Traders as Stocks Retreat: Markets Wrap
Stock price information displayed above a trading floor at the Euronext NV stock exchange in Paris, France, on Tuesday, 1 August 2023. (Photo: Nathan Laine/Bloomberg)

The slide in the world’s biggest bond market deepened and stocks were little changed ahead of the jobs report, which is expected to provide clues on the outlook for the Federal Reserve’s next steps.

Traders also awaited results from Apple Inc. and Amazon.com Inc. — two of the megacap companies that have been critical to the rally in equities this year. Longer-dated Treasuries are now set for their worst week of 2023 amid signs of unexpected economic strength and concern over a widening budget deficit.

A report Thursday underscored resilient demand for workers, while separate numbers showed showed labor productivity climbed, helping to offset rising labor costs. Those figures preceded the government’s employment data — forecast to show the US added 200,000 jobs in July. While that’d be the weakest print since the end of 2020, it’s still a strong advance historically.

“The good news is that almost everyone agrees that an imminent recession isn’t very likely,” said Ed Yardeni, founder of his namesake research firm. “That reduces the downside concerns about corporate earnings, but it increases the downside potential for the stock market’s valuation multiple if the bond yield continues to rise.”

The S&P 500 drifted near 4,500, heading toward its third straight day of losses. The megacap space, which bore the brunt of the recent selling in equities, outperformed. Treasury 30-year yields extended a three-day surge to about 30 basis points. The dollar fluctuated. Wall Street’s favorite volatility gauge, the VIX, headed toward its highest since May.

Steeper Yield Curve

Interest-rate options traders are paying through the nose for protection against further increases in long-maturity Treasury yields.

A metric that compares demand for bearish put options to demand for bullish call options shows the widest divergence since September for options on CME Group Inc.’s US Treasury Bond Futures contract, which currently tracks a bond that matures in 2039. The gaps are less extreme for options on shorter-maturity Treasury futures.

The steepening of the yield curve extended a trend since the Bank of Japan surprised markets last week with a policy tweak. At 4.88%, two-year yields are 71 basis points higher than those on the 10-year note. That’s compared to a gap of 102 basis points two weeks ago.

Investors in inflation-protected Treasuries are being hit hard by a renewed surge in yields. The jump in real — or inflation-adjusted — yields reflects a deteriorating US fiscal picture, which is pushing investors to seek a higher risk premium for owning Treasury bonds.

“This sovereign bond bubble continues to unwind and the problem now is higher rates just exacerbates the sovereign debt rise as interest expense starts to explode higher, everywhere, not just in the US, highlighted by the Fitch downgrade,” said Peter Boockvar, author of the Boock Report. “I remain wary of taking duration risks and still much prefer short duration bonds.”

Elsewhere, oil rose after Saudi Arabia prolonged its unilateral production cut by another month and hinted that deeper reductions may be on the way.

Corporate Highlights:

  • Apollo Global Management Inc. hit an all-time high after it reported a record profit as strong inflows powered results at its Athene annuities business.
  • Tesla Inc.’s China deliveries slumped in July to the lowest level this year, as the electric vehicle maker struggles to attract buyers despite price cuts and other incentives.
  • Qualcomm Inc., the largest maker of smartphone processors, gave a tepid sales forecast for the current quarter, indicating that demand for mobile devices remains weak.
  • Moderna Inc. raised its Covid-19 vaccine sales outlook for the year, finalizing contracts with Japan and several American health-care companies as the US government largely stops paying for the shots.
  • DoorDash Inc. reported a record number of delivery orders in the second quarter, showing consumers’ commitment to takeout despite rising prices.
  • PayPal Holdings Inc. said a key measure of profits shrank in the second quarter as the company had to set aside more money to cover souring loans it has made to merchants.

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