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Market Recap – Bonds & Rising Interest Rates

Market Digest – Week Ending 4/21/2017

Stocks rose in a slow news week. Several big financial institutions reported earnings, with mixed results. Many are focused on the French presidential election, which has its first round Sunday. Marine Le Pen, who has called for France’s exit from the Euro, is expected to advance to the second round.

Weekly Returns:
S&P 500: 2,349 (+0.9%)
FTSE All-World ex-US: (+0.6%)
US 10 Year Treasury Yield: 2.24% (-0.04%)
Gold: $1,284 (-0.2%)
USD/EUR: $1.073 (+0.8%)

Major Events:

  • Monday – Big data software company Cloudera indicated it will seek a valuation near $2 billion in an IPO, an amount lower than previous valuations.
  • Monday – Google bought 1200 acres of land in a private industrial park outside of Reno near the Tesla gigafactory. The company is believed to be planning to build a data center on it.
  • Tuesday – Uber said it generated $6.5 billion in revenue last year but still lost $2.8 billion.
  • Tuesday – Post Holdings agreed to buy Weetabix for $1.8 billion.
  • Wednesday – Morgan Stanley posted stronger than expected earnings, while Goldman Sachs disappointed. In a surprise, Morgan Stanley’s fixed income trading revenue of $1.71 billion surpassed Goldman.
  • Thursday – Verizon reported its first ever quarterly drop in wireless customers.
  • Thursday – General Motors exited Venezuela after the government seized its plant.
  • Friday – The Trump Administration rejected a bid by Exxon Mobile to resume a Black Sea oil venture with sanctioned Russian firm Rosneft.

Our take:

Perhaps the most commonly asked question we’ve received over the last five years is “why would you own bonds?” and “what are you doing about rising interest rates?” It is well known that rates have generally fallen over this period despite expectations. But this year rates must be rising, right?

Indeed, at the short end of the curve, the Fed rate increases are having immediate impact. The three-month Treasury yield has increased from .53% to .79%. But the 10-year and 30-year rates are both down for the year, currently sitting at 2.24% and 2.89% respectively.

What does this mean? First it is a good reminder of how hard it is to predict interest rate moves. When rates are low, bonds are not as attractive as when they are higher, but they are still likely to outperform cash in most years and still provide diversification from stocks. Second, it is somewhat bearish for the economy. Traditionally a flatter yield curve (less spread between short and high yield rates) has reduced bank desire to extend credit and indicated lower growth rates ahead.

Most banks are sticking with .01% interest rates on deposits, but a few of the more aggressive online banks are slowly increasing yields on deposits. If you keep a lot of cash parked in the bank it is getting more valuable to shop around for yield.

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