US bond yields soar
On October 3, US bond yields (BND) soared due to a bond sell-off. The sell-off continued on October 4, though at a slower pace. Yields across the curve moved higher.
While the ten-year US Treasury Yield (TLT) (TNX) hit its highest level since 2011 yesterday, the 30-year US Treasury Yield (UBT) hit its highest level since 2014. The ten-year yield broke above 3.2%, while the 30-year yield touched 3.35%. Investors should note that bond prices move in the opposite direction of yields.
Equities felt the pressure
While equity markets took the bond rout in stride on October 3, yesterday they felt the pressure and tumbled. Higher yields are usually negative for equities because companies’ borrowing costs increase as the risk-free rate goes up. The S&P 500 Index (SPY) fell 0.82%, while the Dow Jones Industrial Average Index (DIA) and the NASDAQ Composite Index (QQQ) fell 0.75% and 1.8%, respectively, on the day.
Reasons for the sell-off
One of the main reasons for the sell-off was the ADP (Automatic Data Processing) report, which showed a huge beat on private payroll growth compared to the consensus. According to the ADP report and Moody’s Analytics data released on October 3, private companies added 230,000 more jobs in September, much higher than expectations of 184,000—and also the best result since the addition of 241,000 jobs in February.
The report was followed by an even stronger data release from the Institute of Supply Management (or ISM), whose services gauge clocked its second-highest reading ever.
These reports point to the fact that the US economy is growing fast—in fact, maybe a little too fast in that it could lead to overheating. The scenario may have worsened in light of Fed Chair Jerome Powell’s speech on October 2, which characterized the US economy as “very good.” We’ll discuss this possibility in more detail in the next article.