Bond Market Semi-Crash: What It Means for Stocks

Bond Market Semi-Crash

Over the past few weeks, U.S. bond prices have declined (close to a semi-crash), and their yields have skyrocketed. Don’t think because you are not directly invested in bonds that what’s going on in the bond market will not affect you. The bond market is much larger than the stock market and a bond market crash can have a major impact on stocks as most major public companies float bonds.

U.S. Bond Sell-Off Speeding Up as Investors Flee

The chart below shows that since February of this year, yields on the 10-year U.S. Treasury Notes have increased by 39%! When bond yields jump higher, it means bond prices are declining and that affects other securities like corporate bonds.

tnx 10 year treasury note yield indx chart

Chart Courtesy of 

10-year U.S. bonds yields—a barometer for the bonds market—are now well above their 200-day moving average and above the 50-day moving average. Classical technical analysis tells us this means the move to the upside is strong and will continue.

For some reason (which I’m sure we will soon find out), investors are becoming less interested in U.S. bonds. According to the Investment Company Institute (ICI), long-term bond mutual funds inflows between February and March have declined by 64%! Data for the month of April is not out yet. (Source: Investment Company Institute, last accessed May 12, 2015.)

Hence, we have a “perfect storm” happening in the bond market. What I want my readers to know is that the rising yield on the 10-year U.S. Treasury will affect other financial instruments tied to interest rates. At the basic level, major public companies that issue bonds to fund their operations will need to raise the rates their bonds pay so they can compete against the yield of U.S. Treasuries. Moreover, mortgage rates will rise. In fact, the 30-year fixed mortgage rate is now at its highest level in seven months. Interest rates on credit cards will rise as well. (Source: Stockhouse, last accessed May 12, 2015.)

How can the stock market continue to rise in value when the yields on bonds are rising so quickly? The answer is: it can’t.