A rapid surge in U.S. bond yields is causing concerns among investors and putting pressure on interest-rate sensitive parts of the stock market. This has led to questions about the sustainability of the current bull run for equities in 2023.
Stock Market Response
On Tuesday, the Dow Jones Industrial Average (DJIA) turned negative for the year, and the S&P 500 (SPX) recorded its lowest close since June 1, resulting in a sharp stock-market selloff. However, the Nasdaq-100 (NDX), which is often impacted by changes in interest rates, is holding up relatively well compared to other large-cap peers.
Areas Affected by Rising Treasury Yields
Here’s a look at some of the areas that have been hit hardest as the yield on the 10-year Treasury note (BX:TMUBMUSD10Y) finished above 4.80% for the first time since August 2007, and the yield on the 30-year Treasury bond (BX:TMUBMUSD30Y) briefly crossed the 5% threshold:
Home Builders
Shares of home builders initially saw a rally earlier this year as rising mortgage rates limited the supply of existing homes for sale. However, the continuous increase in Treasury yields has pushed mortgage rates over 8% for some potential buyers. The SPDR S&P Homebuilder ETF (XHB) has stabilized somewhat but has still experienced a 3.3% decline so far this week and a drop of more than 13% from its 52-week high set in August.
Utilities
Utilities, which are traditionally seen as a defensive sector during stock-market downturns, faced considerable losses in September, falling approximately 6%, making it the second-worst performing sector after real estate. Utilities are usually considered defensive due to their high dividend yields, which make them trade in a similar manner to bonds. However, as Treasury and other bond yields rise, utility shares appear less appealing. Additionally, utilities tend to have high levels of debt, which further amplifies their sensitivity to changes in interest rates.
Small-Cap Stocks Suffering Amid Rising Interest Rates
Despite a positive start to the year, small-cap stocks are now feeling the heat as rising interest rates take a toll on smaller companies with weaker balance sheets compared to their larger counterparts. The small-cap benchmark, Russell 2000 (RUT), has turned negative for the year. The iShares Russell 2000 (IWM) has retreated approximately 14% from its early February high.
Gold Continues to Slide Amidst Market Volatility
Although traditionally considered a safe haven during times of financial market volatility, gold is currently experiencing an extended slide. The rise in Treasury yields is the main culprit, as it increases the opportunity cost of holding nonyielding assets like gold. Additionally, a stronger dollar is putting pressure on the metal, making it more expensive for users of other currencies.
Gold futures (GC00) have slumped significantly, while mining companies like Barrick Gold Co. (GOLD) are facing a continuous decline in their share prices. According to Dow Jones Market Data, shares of Barrick Gold Co. have lost 14.5% over the past ten trading days.
Soaring Dollar Raises Concerns for U.S. Multinationals
The rally in Treasury yields has also fueled a surge in the U.S. dollar, which could be detrimental to U.S. multinationals. Companies heavily dependent on exports and deriving a significant portion of their revenues from overseas sales may struggle due to the strength of the dollar. The ICE U.S. Dollar Index (DXY), which measures the greenback against six other major currencies, has risen by more than 7% since its low point in late July.
These market developments are causing uncertainty among investors and have prompted banks to brace for a potential recession as Treasury yields continue to surge.