October Charts of Interest: Soaring Bond Yields and Falling Bond Prices

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Given what continues to occur in the bond market, the most appropriate thing is to start this month’s charts of interest by focusing on it.

First, some background. Since the end of August 2023, yields on the benchmark 10-year Treasury bond have jumped from 4.09% to 4.91%. Among the reasons for this increase is a resetting of expectations for when the Federal Reserve will stop raising interest rates and begin cutting them.

Yesterday, The Wall Street Journal suggested that the term premium could be playing a role. This is the additional premium traders are demanding via higher yields beyond what would be attributed to monetary policy. The term premium has also risen sharply according to at least one model, the Adrian, Crump and Moench (ACM) model. Its rise suggests that traders are anticipating interest rates to stay higher for longer. As always, expectations and sentiment can change quickly.

“The Biggest Bond Crash Ever?”

The 10-year Treasury bond yielded 0.68% at the start of October 2020. It has been in an upward trend ever since. Since yields and prices are inversely related, bonds have been in a bear market.

In a tweet posted yesterday, Cambria Funds founder Mebane “Meb” Faber described the downturn as potentially the worst bond crash in history. This chart, shared by Faber, is from Global Financial Data.

 Source: Global Financial Data.

High Housing Costs Have Gotten Even More Expensive

The rise in yields continues to push mortgage rates higher. Here are the latest numbers from Freddie Mac. Is it little wonder why the National Association of Home Builders (NAHB)/Wells Fargo Housing Market index fell this month?

Don’t Carry a Balance on That Card

I am one of those people who charges everything possible to a rewards credit card. It’s worked well for me because I pay off the balances weekly. Doing so keeps my spending in line. More importantly, it avoids any interest charges.

This is a good thing because the average interest rate on credit cards is now 21.19%. Charlie Bilello says this is the highest average rates have been since 1994—which is as far back as the data goes.

The Stock Market Has Largely Been Unscathed by Conflicts

The war in Gaza following Hamas’ murderous attack in Israel has brought the prospect of wider Middle Eastern war to the forefront. While we hope this does not happen and the further loss of life is minimized, our focus here at AAII is investing, not global affairs.

To this end, here is what has happened to the S&P 500 index following past military and terrorist shocks. “In the first 30 days after 12 shocks since 1990, the S&P 500 rose an average of 0.4%,” according to CFRA Research chief investment strategist Sam Stovall. He says these returns have reflected a belief among investors that the conflicts would stay localized. However, two of the biggest drops occurred following conflicts in the Middle East: Iraq’s invasion of Kuwait in 1990 and the Yom Kippur War in 1973.

Third-Quarter Earnings Season Is Off to a Good Start

The first reported earnings from S&P 500 companies have been generally coming in above expectations. As of this morning, both the percentage of companies beating (79.5%) and the average magnitude of their beats (7.0%) are above the long-term historical average, per Tajinder Dhillon at LSEG.

Just 78 companies have reported so far, with about one-third from the financial sector. It’s not a representative sample, but still a good start.

Think You Can Forecast Weather Better Than a Meteorologist?

Weather forecasters have long been criticized for their prediction abilities. (And stock market prognosticators—who are even worse forecasters—should thank them for taking the heat.)  Yet, this reputation hasn’t stopped traders from betting on the weather. Reuters says that “average open interest in weather futures and options was four times higher in the January to September period than a year earlier, and 12 times higher versus 2019.”

These contracts serve as a hedge against any adverse weather events occurring before the contract expiration date. These events can be a bad storm, unseasonable temperatures or something similar.

Personally, I’ll stick with checking the Dress My Run website every morning instead of dabbling in these in contracts. (Despite its kitschy name, the website rarely steers me wrong about what to wear from a weather standpoint.)