Stocks started today’s session in positive territory after back-to-back weak showings. But for the positive sentiment to carry through to the end of today’s session, we will need to see the bond market behave. Stocks have been taking their cue from bonds lately, and the trend will most likely continue today as well.
Yields on German government bonds reached a key level today as the 10-year bond crossed the 1% threshold level for the first time since September; they were barely in positive territory just a couple of months back when the 10-year bond yield had fallen to 0.07%.
We are seeing something similar at play in the U.S. Treasury market as well, with the yield on the 10-year bond currently at around 2.4%, up from the mid-April low of about 1.85%. These bond market moves have brought back memories of the ‘taper tantrum’ period when we experienced similar market volatility.
The bond market has remained well behaved for a very long time under the twin influences of the Fed’s low interest rate policy and a big portion of the market parked safely on the Fed’s balance sheet. But many have nevertheless remained apprehensive about rates getting out of control.
[Listen to: Ben Hunt on Information Theory, Bonds, and the Entropic Ending]
The similarity in the uptrend in the U.S. and German bond markets notwithstanding, the drivers aren’t entirely the same. For one, the extremely low levels to which German yields had fallen were unusual and unsustainable – reflective of deflationary fears that have been overtaken by recent economic data. ECB President Mario Draghi’s comment at his last press conference warning of more bond market volatility didn’t help matters either.
But the reality is that while the Euro-Zone economy appears to have stabilized in response to the ECB’s expansive monetary policy, the central bank will likely remain in the current accommodative mode for quite some time. That’s definitely not the case with the Fed, which is gearing up to start raising rates in the not-too-distant future – the consensus view.
In corporate news, Johnson Controls (JCI) is up big on news that the company is exploring strategic options for its automotive business. Johnson is a big player in the automatic seating business, with roughly 75% of its automotive revenues coming from seats. The automotive business is Johnson’s biggest business line, accounting for more than half of its total revenue.
In other news, Target (TGT) announced a dividend hike and doubled its share buy-back program to $10 billion.
