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Market Shaken, Not Stirred, Over Bond Yields

Posted October 11, 2021 at 9:30 am
Patrick J. O’Hare

The Treasury market isn’t open today. It is closed in observance of Columbus Day, but even so, you’ll still be hearing a lot about bonds today (including James Bond since it was opening weekend for No Time to Die).

The reason bonds will be talked about a lot is because energy prices continue to rise, stoking concerns about inflation pressures. That is pushing up sovereign bond yields today and feeding a belief that the 10-yr Treasury note yield will follow when trading resumes on Tuesday.

Currently, the 10-yr German bund yield is up three basis points to -0.12%, the 10-yr UK gilt yield is up three basis points to 1.19%, and the 10-yr Japanese government bond yield is up one basis point to 0.09%.

More to the pressing point, WTI crude futures are up $1.70, or 2.1%, to $81.05/bbl while Brent crude futures are up $1.51, or 1.8%, to $83.91/bbl. Unleaded gasoline futures are up $0.03, or 1.3%, to $2.40/gal. Natural gas futures had been pushing $5.80/mbtu earlier, but have recently taken a dive and are now down $0.13, or 2.4%, to $5.43/mbtu.

The prices for all of these energy products had been higher earlier, so there is some cooling off as the stock market open approaches.

Still, higher oil prices should bode well once again for the energy stocks, assuming concerns about demand destruction or efforts to increase supply don’t gather their own momentum. At the same time, the higher cost for energy products is going to foment profit margin concerns for other companies, particularly the transportation stocks.

Airlines will be a focal point there. Southwest Airlines (LUV) for its part has drawn added attention to itself after cancelling close to 2,000 flights over the weekend, citing air traffic control issues, bad weather, and staffing issues. Shares of LUV are down 2.9%.

Equity index futures, though, are showing more resolve. S&P 500 futures are down nine points and are trading in-line with fair value, Nasdaq 100 futures are down 76 points and are trading 0.5% below fair value, and the Dow Jones Industrial Average futures are down five points and are trading 0.4% above fair value.

That’s the framework for a relatively mixed start when the opening bell rings on a week that will mark the official start of the Q3 earnings reporting period. Per usual, the financial sector will take the lead in getting things going. There will be a lot of attention on commentary regarding loan demand and net interest margins given the steepening yield curve.

In general, there should be a lot of discussion about margin pressures during the reporting period given the supply chain issues, transportation bottlenecks, and rising labor costs. We suspect the market will tolerate such talk so long as it is accompanied with indications that demand is strong enough to push through price actions that help offset the impact on profit margins.

For more on the upcoming earnings season, as well as the wage inflation that is becoming a policy problem for the Fed, be sure to read The Big Picture page.

Originally Posted on October 11, 2021 – Market Shaken, Not Stirred, Over Bond Yields

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