The 10-year Treasury yield eased from a 24-year high after a solid $39 billion bond auction calmed demand fears, even as FOMC minutes signaled another rate hike by year end. Meanwhile, technology stocks are the only sector keeping the S&P 500 near record levels while higher rates batter the rest of the market.
Yields retreat after a strong auction
The 10-year Treasury yield last traded at 5.286%, more than one basis point higher on the day but down from an earlier peak of 5.35%, its highest level since 2002. The 30-year bond yield also pulled back from a 24-year high, trading at 5.666%.
A $39 billion sale of 10-year notes drove the retreat, which BMO called "strong." Indirect bidders, including global central banks, took 80.3% of the auction, above the 10-auction average of 72.4%. According to Peter Boockvar, market strategist and author of The Boock Report: "The 24-year highs in rates brought out the buyers and resulted in a great auction". Still, the auction's 5.3% yield was the highest since 2000.
Selling pressure builds globally
Bonds have been selling off on investor concerns about inflation and rising energy prices. The 10-year yield has surged 60 basis points since the end of July, while U.S. crude prices have climbed 20% over the same period.
The pressure extends overseas, too. The 10-year French bond yield jumped 12 basis points to 4.876%, and the 10-year U.K. Gilt yield rose 7 basis points to 5.447%. Against this backdrop, FOMC minutes showed officials expect another rate hike is likely appropriate by year end, though they gave no indication of timing.
Technology shields the S&P 500 from the damage
Higher rates are taking a toll across most of the stock market, but one sector has kept the index afloat. Since Sept. 1, the Technology Select Sector SPDR ETF has advanced 10% through Oct. 6, while the S&P 500-tracking SPY has gained 2.3%. Every other sector in the index has declined over that stretch.
The steepest declines have hit rate-sensitive groups. The Real Estate Select Sector ETF fell nearly 7% over the same period, followed by the Financial Select Sector ETF, down nearly 6%, and the Materials Select Sector ETF, down more than 4%.
Chip stocks carry the rally
Momentum in semiconductors is doing much of the work. AMD shares have rallied more than 40% since Sept. 1, Intel has climbed more than 26%, Applied Materials has gained about 20%, and Micron has advanced 12%. Nvidia, described as the leader of the trade, is up about 10% over the same stretch.
The Invesco S&P 500 Equal Weight ETF is down nearly 2.5% since Sept. 1, even as the cap-weighted SPY has risen more than 2%. The gap shows how sector rotations out of nearly everything and into technology have masked underlying weakness in the headline index.
Sources: CNBC, MarketWatch
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