STOCKS WENT HAYWIRE TODAY. THE STEEPENING TREASURY YIELD CURVE TELLS THE REAL STORY / BARRON´S MAGAZINE

Stocks Went Haywire Today. The Steepening Treasury Yield Curve Tells the Real Story.

By Alexandra Scaggs


A morning briefing on what you need to know in the day ahead, including exclusive commentary from Barron's and MarketWatch writers.




Compared to the stock market’s wild Friday swings, Treasury yields provided a clear narrative.

Long-term Treasuries sold off after the morning’s employment report, with yields grinding higher throughout the session. To compare, the S&P 500 climbed 0.7%, fell 2.8%, rebounded to trade nearly flat, and then slid again to close 0.8% lower.

Yields on the 30-year Treasury bond ended the day higher by 13 basis points, or hundredths of a percentage point, at 1.47%. The benchmark 10-year yield climbed 10 basis points to 0.72%, and the two-year yield advanced by two basis points to 0.15%.

The increase in yields was pretty unusual for a day when the Nasdaq Composite slides 1.3%. Normally, investors buy Treasuries when stocks are down, as they worry that an economic slowdown could hurt growth-sensitive markets. But this selloff brought one of the largest single-day increases in the 30-year yield since the pandemic.


That helps back up one theory circulating to explain the tech selloff: Investors may be betting the U.S. is approaching a broad reopening and the economic growth that could come with it. If that is the case, there is less reason to own the pandemic’s biggest winners. And it could lead to a rebound in inflation, even just to average levels, which would erode the value of long-term Treasuries compared to other maturities.

Bank stocks’ gains can be explained by that fundamental thesis, and not only because a widespread improvement in creditworthiness would help banks’ balance sheets. Investors also believe that a wider gap between short-term and long-term benchmark rates helps banks’ profitability. The SPDR S&P Bank ETF (KBE) closed with a 1.9% gain.

Tech-stock underperformance also fits with that theory, since pandemic standouts such Zoom (ZM) and Peloton (PTON) lagged well behind the broader market on Friday. (They fell 2.8% and 2.2%, respectively.) But it also wasn’t clear how much of the losses were technical and linked to the news that sizable buying of tech-stock options by SoftBank helped drive the market higher in recent weeks.

The rise in Treasury yields has an alternate and more technical explanation as well. In trading days with high volatility, banks’ trading desks may be less eager to warehouse long-term Treasuries, since longer maturities carry greater duration risk. And if banks offload them into the market instead, that could depress prices, at least temporarily. Liquidity going into the three-day holiday weekend normally isn’t robust, either.


To figure out which explanation fits best, investors should watch to see whether the Treasury market’s move persists after the holiday weekend. If it does, the stock-market trends set on Thursday and Friday may continue, with banks higher and tech lower. If not, there could be a tech-stock rebound on the way.