Wall Street Lunch: Treasury Yields March Higher

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The 10-year tops 4.75% as longer bonds continue drastic selloff. (0:15) Delta is the latest carrier to find fake engine parts. (2:27) U.S. shale producers won’t drill even if oil hits $100/barrel. (3:34)

This is an abridged transcript of the podcast.

Our top story so far

Treasury yields continue their march into rarefied air. The 10-year Treasury yield (US10Y) hit a 16-year high in today’s trading.

The 10-year yield topped 4.75% this morning. It hasn’t closed above that level since August 2007.

For context, the 10-year was trading close to 3.3% six months ago.

The 20-year Treasury yield (US20Y) topped 5% for the first time in its brief history.

Allianz advisor Mohamed El-Erian says, “Simply put, last year was about markets adjusting to higher rates. This year is about markets adjusting to rates staying high for longer. The process of market adjustment is ongoing, while that of the economy is at a significantly earlier stage.”

SocGen’s Kit Juckes explained the move on the longer end, pointing out that the Fed staying high for as long as necessary “adds to investor doubt about the merit of receiving lower yields on long-dated Treasury debt than they can get at the front end, when they face a steady flow of supply and data (that) doesn’t point to imminent recession.”

He adds that “the easiest way to boost demand for long-dated bonds isn’t through higher yields; it’s through a change in expectations about the outlook for short-term rates as the economy weakens.” That’s “one reason why soft landings are so hard to pull off. Higher yields will hurt the economy before they attract ‘value’ investors. And by then, it will be too late to avoid recession.”

In today’s trading

An unexpected jump in job openings added more upward pressure on yields. The August JOLTS report showed a rise in openings to 9.61 million vs. the consensus of 8.75 million and 8.92 million in July.

July’s drop was the first time openings had been below 9 million since March 2021.

Stocks are facing the brunt of these higher rates. The S&P (SP500) is down 1%, with the growth-heavy Nasdaq (COMP.IND) off a little more and the Dow (DJI) faring a little better.

High-valuation and rate-sensitive sectors fared the worst. Consumer Discretionary (XLY), Info Tech (XLK), REITs (XLRE), and Utilities (XLU) are struggling the most. Materials (XLB) is the only gainer.

Among active stocks

Shares of POINT Biopharma Global (PNT) surged after Eli Lilly (LLY) agreed to acquire the cancer drug developer for $12.50 per share cash in a deal valued at ~$1.4 billion.

Nvidia (NVDA), AMD (AMD), and several other semiconductor stocks were in focus on Tuesday as investment firm KeyBanc Capital Markets said its recent supply chain checks were “mixed,” as China is still weak but there are signs of recovery elsewhere.

“China demand remains weak but does not appear to be getting meaningfully weaker, while we are seeing pockets of recovery within the PC and smartphone markets,” a group of analysts, led by John Vinh, wrote in an investor note.

In other news of note

Delta Air Lines (DAL) is the latest major U.S. air carrier to find fake engine components that do not comply with documentation standards. The carrier was alerted by one of its engine service providers.

Delta did not specify which components were non-compliant, nor did it disclose how many engines had these parts. A company spokesperson said none of Delta’s aircraft are currently flying with unapproved parts, and flight operations remain unaffected.

The unapproved parts were certified by AOG Technics, a company already under regulatory scrutiny for spare engine parts sold to CFM International, which is a joint venture between General Electric (GE) and Safran (OTCPK:SAFRF).

And U.S. shale producers say they will keep drilling under wraps, even if oil prices top $100 per barrel. In an FT report, they stressed the need for financial discipline during what they see as President Joe Biden’s “war” on fossil fuel production.

At an energy conference last week in Oklahoma City, many companies cited the Biden administration’s decisions to limit drilling on federal lands and waters as the main reason they are restricting their investments, as well as ongoing permitting delays. They also highlighted what they called hostile rhetoric from the administration.

And in the Wall Street Research corner

Canaccord Genuity’s U.S. equity research team says Wall Street is ripe for a tactical rally. But strategist Tony Dwyer says this is more an oversold rally than a shift in market trends.

He said that “absent a significant and sustainable drop in U.S. Treasury, Corporate, and Mortgage yields, any rally should prove temporary, as was the case this last summer.”

But the percentage of S&P 500 components above their 10-day moving averages is now single digits.

Dwyer says they view this indicator as their “most sensitive measure of market internals, and any reading below 10% suggests any further losses should be made up on an oversold bounce.”