Markets Break Higher as Bond Yields Freeze

A mostly flat day of trading broke higher in the final hour of the session, after opening in the red across the board. There wasn’t much by way of economic or earnings data from which to glean, aside from a National Homebuilders’ survey (more on this later), but a curious thing happened to the ever-creeping yields of both 2-year and 10-year treasury bonds.

The Dow closed +197 points, +0.64%, while the S&P 500 landed squarely on 3900.00 at the bell, +0.69%. The Nasdaq outperformed the other indices, +0.76% on the day, while the small-cap Russell 2000 did nearly as well, +0.73%.

Treasury yields came down a tad off morning highs, but both 2-years and 10-years — which, BTW, have been inverted now nearly six months — seemed to hit a ceiling: for the 10-year, reaching up to 3.5% matched the highs we saw back in 2018; for the 2-year, closing at 3.95%, it did not seem to “want” to hit 4%. As this pertains to ongoing interest rate hikes, even as inflation metrics are still well beyond optimum inflation, these bond yields appear right in the pocket of where the Fed is heading.

We saw roughly three-to-one positive trades to negative ones today with the big bounce higher in afternoon trading. We also didn’t see much volatility — understandable, this close to a new Fed announcement — which to some may depict an investment scenario that’s arrived pretty much where it needs to be. A quiet Volatility Index (VIX) today in the face of rising bond yields appears as if plenty of investors are keeping their near-term powder dry.

The North American Home Builders (NAHB) Index for September today registered its ninth straight month lower: 46, lower than the 47 expected and the 49 posted for August. We’re also below the 50 mark, implying negative productivity for home builders; in fact, the NAHB is doing more than implying it, it’s actually calling current conditions a housing recession. Much of this, BTW, can be traced to the Fed’s cranking up of interest rates since early March — 30-year mortgage rates have more than doubled to 6.42% on average.

Homebuilders are also now sitting on 10.9 months’ supply, doubling the 5.5 months we saw back in December. Supply chain and labor issues have mostly been ironed out; the problem with housing right now is mostly to do with pricing: the higher mortgage rates are leading to discounted home prices in order to sell them. Existing Home Sales for August, which we’ll see Wednesday, are showing fewer homeowners putting their homes up for sale as the valuations dwindle.

Housing Starts and Building Permits are on deck for tomorrow morning, but otherwise we expect a quiet news day as the two-day Fed meeting commences. It’s already clear the debate, to the extent one exists, will between whether to raise interest rates 75 or 100 basis points. Either way, we’re still on our way to our final destination amid this extraordinary half-year (so far) of rate hikes; neither 3.00-3.25% nor 3.25-3.50% are expected to be where the Fed quits hiking.

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