Stocks are sliding, government bond yields are soaring, and investors are reacting strongly to scraps of economic information that they typically ignore.
In other words, the markets are jittery — veering between fears that the economy is running too hot and worries about a downturn so sharp that the country tumbles into recession. It’s an environment in which a big economic update, like the September jobs report, could be pivotal.
The squeamishness is most apparent in the $25 trillion market for U.S. Treasuries, where yields on government bonds have risen to highs not seen since 2007. Though the jump in bond yields partly reflects bets on a strong economy, the moves have fanned out into the stock market, too. For stock investors, higher yields are generally a negative — and the S&P 500 index is on track for its fifth consecutive weekly decline.
If the jobs report strays from economists’ expectation of a 170,000 gain in September, in either direction, markets could move sharply.
It’s all about interest rates.
There are many different interest rates that matter. There is the rate that the Federal Reserve sets, which is a target for overnight borrowing costs. There are consumer and corporate borrowing rates, like those on credit cards or mortgages. And then there are government debt yields, which partly track the Fed’s policy rate but stretch out over much longer periods and factor in other information such as inflation and economic growth.
Arguably the most important of these rates is the yield on the 10-year Treasury bond, a measure of what it would cost the U.S. government to borrow money from investors for 10 years, but also a crucial input to virtually every other long-term interest rate in the world, making it a cornerstone of the global financial system.
It also influences how companies are valued and, therefore, it holds sway over the stock market. Higher treasury yields indicate higher costs for consumers and businesses, which typically weigh on the market.
This week, the yield on the 10-year Treasury bond rose to 4.8 percent, its highest level in 16 years, from 4.57 percent at the end of last week. The S&P 500 has fallen 1.6 percent this week, and is down about 7 percent in the more than two months that the yield has been rising.
Rates have been rising for a while. What’s so scary now?
The Fed has been raising interest rates for roughly 18 months, but the yield on 10-year Treasuries had remained fairly steady for the first half of 2023, oscillating in a range of 3.5 to 4 percent.
Over that period, the S&P 500 rallied nearly 20 percent, buoyed by better-than-expected corporate profits, slowing inflation, a resilient economy and greater consensus about the end of the Fed’s rate-raising cycle.
But persistently strong economic data has led to higher expectations for growth, while concerns that inflation could remain stubbornly too high have raised expectations that the Fed may have to keep rates elevated for longer than previously thought to finish the job of taming prices. As a result, in early August, the yield on the 10-year bond began a swift ascent.
That move has upended some of the market’s long-held assumptions. After a period of relative stability, investors are re-evaluating what higher rates could mean for consumers and companies, catalyzing a sell-off in the stock market. The S&P 500 slumped nearly 5 percent in September, its worst month of the year so far.
Add in a sharply appreciating dollar — also tied to rising interest rates — and wild swings in the cost of oil, and the outlook for the economy has become more uncertain.
“All these things thrown into a blender — the uncertainty and the speed of how things are moving — is what has kept the market uneasy,” said George Goncalves, head of U.S. macro strategy at MUFG Securities.
Is congressional turmoil a factor?
The recent brush with a government shutdown and the removal of Kevin McCarthy as House speaker on Tuesday did not rattle markets on their own, but it did highlight the government’s instability, a few months after narrowly averting a potentially devastating debt default.
Rising interest rates have compounded concerns about the government’s finances, with the prospect of high rates focusing attention on the rising costs of servicing the United States’ mammoth debt pile and persistent budget deficits.
At the moment, unemployment is low and the economy is performing better than many expected. Should growth slow, the fiscal challenge facing Washington will intensify, said Ajay Rajadhyaksha, global chairman of research at Barclays.
And assuming no cuts in spending and that rates remain elevated, Mr. Goncalves said, higher deficits could beget higher yields, which in turn could push deficits higher.
