Rising yields rattle the markets

By: Edward Jones
 
DEWITT, Mich. - Jan. 10, 2022 - PRLog -- 2022 begins with a bang:

Markets started 2022 with a bit of a bang for investors. In the first week alone, we have seen the S&P 500 fall over 1.0%, with a notable rotation underneath the surface: growth sectors like technology and discretionary underperformed, while more value sectors like energy and financials held steady1.

This rotation has been driven primarily by a sharp rise in yields, with the 10-year Treasury yield going from 1.34% in early December to around 1.75% this week1. This has put pressure on assets that are considered "long duration" and have loftier valuations, like parts of technology, as well as on assets that are considered "bond like," such as utilities and real estate (which have high yields and more stable cash flows).

Have we seen this movie before?

If this week's move in markets seems familiar, it is because we have seen similar market moves over the course of the pandemic. In fact, since the start of the pandemic, yields have risen sharply over a short period of time on about three occasions, each of which have been accompanied by a sell-off in the Nasdaq and growth sectors broadly. If history is any guide, these sell-offs are relatively short-lived, with the average duration of the sell-off about 21 days, or three weeks, and the average drawdown from the recent Nasdaq peak around 8.0%. Treasury yields typically rise about 0.45 percentage points during these periods, as well1.

In this past week's sell-off, we have seen 10-year Treasury yields rise about 0.40 percentage points, to around 1.75%, and the Nasdaq has sold off 5.0% from its December 27 peak, getting closer to the historical 8% drawdowns1. The risk-reward for these growth sectors certainly seems more favorable at these levels, and if we get more downside from here, this may provide an opportunity to add to technology and growth sectors broadly.

What is driving yields higher? All eyes are on the Fed

While the move higher in yields began early in the week, it was exacerbated when the Federal Reserve minutes from its December 2021 meeting were released on Wednesday. These minutes indicated that the Fed was not only considering accelerating its balance-sheet tapering process, but also letting the balance sheet rollover and decline sooner than most expected. This potential reduction of liquidity in the system spooked markets, particularly those areas with loftier valuations, as there seemed to be less air for speculative assets in the new environment.

Sources: 1. Bloomberg

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