Bond traders are at it again, pushing Treasury yields higher and suggesting the Fed was too hawkish when it cut interest rates by half a percentage point last month. The recent rise in yields has put pressure on the stock market — specifically, the names in our housing-related portfolio. The 10-year Treasury yield — which affects all types of consumer loans, including mortgage rates — rose again on Wednesday, reaching a session high of 4.26%. This is a level not seen since late July when yields began falling in anticipation of the Fed's rate cut, which came on September 18. Since then, the 10-year bond yield has been on its way higher. On the shorter end of the yield curve, the two-year chart follows a similar pattern. US10Y US2Y 3M Three-Month Performance The hope when the Fed started cutting interest rates was that short-term Treasuries would move down at a greater pace than longer-term ones, providing relief to borrowers and investors. This is not what has been happening lately. Both 2-year and 10-year bond yields have risen recently. Interest rates are similar to gravity for stocks – the higher the rates, the greater the competition for investment dollars. High, risk-free government bond yields become an attractive way to gain returns compared to the volatility of stocks. A rise in the 10-year Treasury yield also halts relief in mortgage interest rates. The average 30-year fixed-rate mortgage, despite being more than 1 percentage point lower than a year ago, has risen for three weeks in a row. In Freddie Mac's latest weekly survey, the 30-year fixed rate was 6.44%. Lowering interest rates by the Federal Reserve represents an easing of monetary policy, allowing the economy to grow faster and easier and making debt more affordable. The downside of these dynamics is that a hotter economy also increases the odds of sparking inflation again, just as it has begun to moderate. Bond traders are concerned about the return of inflation because economic numbers have become stronger since the central bank governors' meeting in September. Market odds for a quarter-point Fed cut next month remain essentially a lock, according to the CME FedWatch tool. But after that, the chances of a cut in December diminish. However, a disturbing rebound in inflation is not what we are calling for, and is not what we base the club's investment decisions on. Another dynamic pushing bond yields higher is concern about what happens to the national debt and trade deficit under a new presidential administration. It's anyone's guess whether the rise in yields is a bet on next month's election or reflects a view that no matter who wins, fiscal policy will remain loose. Both presidential candidates seem to agree on one thing: the cost of living is too high. Among the unavoidably large items on consumers' balance sheets are housing costs, which has been one of the most challenging areas of inflation. For housing prices to fall, we need to increase housing supply and lower mortgage rates to incentivize builders and incentivize buyers and sellers. Many potential sellers are sitting on historically low mortgage rates and are reluctant to move, driving up home prices. Potential buyers are reluctant to pay high home prices as well as high mortgage rates. Increased housing formation based on Fed rate cuts is central to our investment cases for three stocks in the Club portfolio: Stanley Black & Decker, Home Depot, and Best Buy. Rising bond yields and rising mortgage rates have diminished the benefits of Fed easing, as we highlighted in Tuesday's small addition of more Home Depot shares. However, ultimately, fighting the Fed has proven to be a fool's errand in the long run – so, we expect interest rates to eventually fall. In addition, the management teams at Stanley Black & Decker, Home Depot, and Best Buy effectively execute on the things within their control. They will certainly benefit from lower interest rates – but rates alone are not the reason we hold positions. We're in it because fundamentals are improving, which will only become clearer when interest rates fall. Bottom line: The rise in bond yields is not sustainable, in our view, because short-term Treasury yields are bound to fall if the Fed exerts enough pressure. The longer end of the curve should then come down and provide the necessary relief to mortgage rates. When that happens, you'll want to already have interest rate-sensitive stocks on the books. Maybe we were early. But we are ready. It would be a mistake to abandon these names now, when the Federal Reserve has announced that its interest rate cutting cycle is in effect. By the time it becomes clear that the 10-year yield has peaked, you will likely have missed a significant portion of the move. (Jim Cramer's Charitable Trust is long SWK, HD, BBY. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you'll receive a trade alert before Jim takes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charitable fund's portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. The above Investment Club information is subject to our Terms and Conditions and Privacy Policy, as well as our Disclaimer. No obligation or fiduciary duty exists or is created by your receipt of any information provided in connection with the Investment Club. No specific results or profits are guaranteed.
Cars pass by the Federal Reserve Building on September 17, 2024 in Washington, DC.
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Bond traders are at it again, pushing Treasury yields higher and suggesting the Fed was too hawkish when it cut interest rates by half a percentage point last month. The recent rise in yields has put pressure on the stock market — specifically, the names in our housing-related portfolio.
