Yield - At the top of every single institutional investor's Wish List this Holiday season was one, simple thing: yield. Not the kind of yield that carries risk and uncertainty of course, these investors want that risk-free, for-sure kind of yield that only comes from treasuries. And just a few weeks late, Santa is finally delivering.
Last week, the yield on the U.S. 10yr treasury note jumped up 0.273%, which, although sounding small, is the fastest weekly increase seen since September of 2019 (2.25 years ago, if anyone's counting). And as of yesterday morning, the yield on this so-called risk-free rate has climbed above 1.8% for the first time since the start of the pandemic. Yields are back baby, and it's all thanks to the Fed.
Like we've said many-a-time before, investor expectations of monetary and fiscal policy matter arguably just as much as actual implemented actions. Financial markets are forward looking mechanisms, so anytime some new expectation comes onto the scene, the result of the actions gets priced in at least partially beforehand. That is likely the exact story playing out right now in Treasury markets. As the Fed has indicated three rate hikes in 2022, and with banks like Goldman Sachs now expecting four hikes this year, the underlying interest rate on U.S. treasuries will increase, meaning the yields on these instruments will be derived from a higher base rate.
So what does increasing Treasury yields mean for investors? Well, a lot, but let's quickly touch on just two.
First, fixed income investors finally catch a (slight) break. With yields having been so low and recent inflation figures clocking in monstrously high, real yields have been negative for quite some time. This means that in terms of purchasing power, holders of U.S. treasury products have been slowly but surely watching their money burn. With yields rising on news of the Fed looking to fight inflation, this problem gets a little easier.
Second, equity investors finally get a well-earned slap in the face. When valuing a company, analysts apply a discount rate to projected earnings, cash flow, sales, etc., or whatever metric the value is being derived from. The risk-free rate, aka the U.S. 10yr, is a big component of that discount rate. As the discount rate increases, the current value of projected future earnings or cash flows decreases, leading share prices to fall. Companies that rely especially on future growth of earnings as opposed to having the stability now get hit the hardest, hence the cratering of high tech / growth stocks of late.
So there you have it. Fixed income might be (is) super boring, but it really does run the show for basically every other financial asset. Can't hurt to take a look.
Get Ready for Earnings Szn - This week, the REAL most wonderful time of the year begins. 2022's first iteration of earnings season kicks off on Thursday, continuing into Friday and the following week with some of the most timely and economically vital businesses stripping down for their equivalent of a yearly physical.
On Thursday, semiconductors and airlines take center stage. Delta Air Lines ($DAL) and Taiwan Semiconductor Manufacturing ($TSMC) will drop their latest financials and safe to say Wall Street can't wait. Given the disruptions to both travel and semis since the pandemic began, every release sheds new light by answering some questions and creating even more in the minds of market participants. You might be wise to expect higher volatility than usual in these names coming into Thursday…
Friday is where the real, real fun begins because what is more fun than a whole bunch of bank earnings releases. Headlining the event include J.P. Morgan, BlackRock, Citi, and Wells Fargo who will each give a more boots-on-the-ground look at the broad health of the U.S. economy over the last few months.
Earnings szn baby, it's been way too long. You fired up yet?