The Market Believes the Fed Will Have to Raise Rates Soon. What It Means for Stocks.

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Jerome Powell, Federal Reserve Chairman.

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Samuel Corum/Businesshala

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Fixed-income markets are indicating that the Federal Reserve will have to raise interest rates sooner than expected, which could dent the stock market.

The yield on the 2-year Treasury note has risen from 0.5% in early November to 0.64% as of Wednesday. The move suggests investors expect the Fed to raise interest rates to counter inflation that remains higher than expected due to increased consumer demand and supply chains that are struggling to match demand. has been

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Indeed, minutes released on Wednesday from a Fed meeting earlier this month suggest central bank members are prepared to raise rates sooner than previously expected if inflation remains high.

This confidence is starting to creep into the credit spread between corporate and government debt. The Bank of America Index of Investment-Grade Corporate Bonds shows that, overall, the Treasury yield spread has risen to 0.94% from 0.89% earlier this month as investors fled corporate bonds in anticipation of a rate hike. Which can slow economic growth and pressure gains.

In line with this, the credit spread for investment-grade corporate bonds is rising relative to government debt in more economically sensitive sectors. According to FactSet, the S&P 500 yield in ten-year bond issuances by manufacturing companies is 1.08 percent higher than 10-year Treasury notes, a 0.99 percentage point increase from the 0.99 percentage point seen at November’s lows. The spread of corporate bonds in the energy sector has increased by 1.41 percentage points from November’s low of 1.2.

“Market expects one to two” [rate] “Next year growth and that’s why you’re seeing an increase in credit spreads,” said Jon Hamm, wealth advisor at New England Investments and Retirement Group. baron’s Wednesday.

Although the major indices are down from their all-time highs, the sentiment hasn’t led to a selloff of more than 5%. S&P 500,

Nasdaq Composite,
And the Dow Jones Industrial Average is down 0.1%, 1.3% and 1.7% from their highs.

But the pain may come as credit spreads continue to expand. “Eventually he’s going to crawl back into the equity market,” Harvey said.

Write to Jacob Sonenshine at [email protected]


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