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S&P 500 drops as bond yields rise

by Jonathan Adams
bond yields rise

The Nasdaq Composite dropped 0.3%, and the Dow Jones Industrial Average ended 0.2% higher

The S&P 500 dropped on Tuesday, back from a record high as rising bond yields kept investors on edge.

The broad equity benchmark erased a 0.4% rise to finish 0.1% down at 3,932.59. The tech-heavy Nasdaq Composite dropped 0.3% to 14,047.50. The Dow Jones Industrial Average ended 64.35 points up, or 0.2%, to 31,522.75, eking out a record close.

The 10-year Treasury yield climbed 9 basis points Tuesday to top 1.30%, its highest since February 2020. The 30-year rate also rose to its highest level in a year. Many on Wall Street believe that rising interest rates could make the equity market less attractive, while posing a threat to sectors such as tech that have benefited due to the low-rate environment.

Higher yields, while good for banks, are hitting the bond surrogate sectors like REIT’s, Utilities and Staples, said Art Hogan, National Securities chief market strategist. The market can digest rising yields, especially when they are going up for the right reason, but not when they go up in a linear fashion.

The benchmark 10-year Treasury yield, a measure for mortgages, student loans and credit card annual percentage rates, wallowed nearly 0.6% for much of 2020. Many worry that a rebound in rates could hit the economic recovery from recession as companies and consumers may find it more expensive to borrow. Others wonder if a deluge of economic stimulus could spark a rise in prices after years of dormant inflation.

Energy was the best-performing sector, gaining 2.3% as a deep freeze in the South sparked a rally in oil prices and put West Texas Intermediate crude futures above $60 a barrel for the first time in over a year.

The market has seen solid gains this month due to the rollout of the Covid vaccine, economic reopening and expectations for more fiscal stimulus. The Dow has added 5.1% in February, while the S&P 500 and the Nasdaq have jumped 5.9% and 7.5%, respectively. The S&P 500 has seen ten record closes in 2021.

Earlier on Tuesday, the major averages hit new highs after a market volatility gauge fell below a key threshold, clearing the way for more buying from quant funds.

The Cboe Volatility Index was below 20 to settle at 19.97 on Friday, marking the first significant breach of the threshold since the pandemic-induced sell-off began in February 2020. However, stocks registered a downturn as the VIX rose again. The gauge rose above 21.

The crack of the 20 level is seen by some on Wall Street as an indication of big “risk on”, which could spark buying from algorithmic traders and other big players. The gauge last traded one point higher to 21 on Tuesday morning.

We believe a sustained move below 20 will be positive for risk markets, said Tom Lee, FundStrat’s co-founder and head of research. It will be a sign that the systemic fear that gripped markets in 2020 is finally fading.



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