FOMO (fear of missing out) seems to be the dominant theme in the stock market YTD. Stocks are already up 4.2% in only 9 trading days, and on only one of those days has the stock market fallen. And fallen may be an overstatement.
One of the major factors (though not the only one) that has enabled such a strong start to the year is the abnormally low level of long-term interest rates in the face of a domestic and global economy that looks to be humming. The 10-year Treasury rate remains below its 2018 high of 2.62%.
Chasing return in stocks because bond yields are low has been an ongoing theme of this bull market, but could 2018 finally be the year that interest rates rise significantly?
The WSJ makes the case that we could see rates as high as 3.5% in 2018. Faster inflation, less intervention from central banks, and bigger deficits are cited by the journal. Higher rates would be a welcome development for income investors who have suffered through years of meager interest income crumbs, but maybe not such positive news for those who have reached for yield.
The Journal explains:
To get to that yield, the price of the 10-year Treasury would drop 8%, a big loss on a safe government bond. Nearly every other market—stocks, commodities, emerging markets and other bonds—are priced for low bond yields. The losses there could be bigger.
No matter where yields end up this year, understanding how they will get there is increasingly important.
Read more here.
Jeremy Jones, CFA
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