Post by unlawflcombatnt on Jun 11, 2007 2:06:35 GMT -6
Below is an excerpt from a good article from the Wall Street Journal explaining the how bond rates and stock prices are interrelated, and how the most recent stock declines have been greatly affected by the surge in bond yields. The article was written by Gregory Zuckerman and Jaclyne Badal, and is titled
What's Behind the Stock Market Jitters?
"June jitters are leaving investors frazzled.
After a strong May for stocks, and an impressive start to 2007, shares tumbled last week amid growing worries about rising global interest rates, inflation and whether the buyout boom that has propped up the stock market can continue.
Thursday was a particularly ugly day. All 30 stocks in the Dow Jones Industrial Average declined, as the benchmark fell 198.94 points, or 1.5%. But the week's losses were trimmed on Friday, when the Dow industrials jumped 157.66 points or 1.2%.
For the week, the Dow benchmark was off 1.8% and the Nasdaq Composite Index dropped 1.5%. Other investments, such as gold, also fell. So far this year, the Dow industrials are up 7.7% and the Nasdaq is up 6.6%.
Behind last week's worries: Sudden troubles in the bond market. In the past three weeks, the yield on the benchmark 10-year Treasury note has soared to 5.1% from 4.7%, a huge jump for bond yields, which move in the opposite direction of their prices. Indeed, on Thursday, the Treasury market saw its worst price declines in more than two years.
Bond yields now are at their highest levels in a year. There were other troubling signs last week, including bearish talk of Treasury yields climbing to 6.5% in the next five years by longtime bond bull Bill Gross, manager of giant Pimco Total Return Fund.
How Bonds Affect Stocks
Why do bonds matter so much? Rising bond yields put pressure on the economy, by making all kinds of debt more expensive, including home mortgages and corporate loans. At the same time, higher yields make bonds more attractive to investors and thus make stocks relatively less attractive.
Just as important, if the debt markets run into difficulties, that could bring to a halt the rash of mergers that have been running at record levels and have been a key underpinning to the stock market. Higher rates drive up the costs of the heavy borrowing that leveraged-buyout specialists rely on to finance takeovers. If the appetite for acquisitions wanes, it likely will put a damper on the overall stock market, analysts say.
"Today the bond market and the stock market are more intertwined" because of the high level of leveraged buyouts, or LBOs, says John Linehan, a portfolio manager for T. Rowe Price Value Fund in Baltimore. "The [stock] market needs the fuel of cheap debt [because] these LBOs need the fuel of cheap debt."..."
Below is a graphic from the article showing the trend of bonds compared to the trend of the stock market.
The rest of the article can be found at the Wall Street Journal under the title What's Behind the Stock Market Jitters?.
What's Behind the Stock Market Jitters?
"June jitters are leaving investors frazzled.
After a strong May for stocks, and an impressive start to 2007, shares tumbled last week amid growing worries about rising global interest rates, inflation and whether the buyout boom that has propped up the stock market can continue.
Thursday was a particularly ugly day. All 30 stocks in the Dow Jones Industrial Average declined, as the benchmark fell 198.94 points, or 1.5%. But the week's losses were trimmed on Friday, when the Dow industrials jumped 157.66 points or 1.2%.
For the week, the Dow benchmark was off 1.8% and the Nasdaq Composite Index dropped 1.5%. Other investments, such as gold, also fell. So far this year, the Dow industrials are up 7.7% and the Nasdaq is up 6.6%.
Behind last week's worries: Sudden troubles in the bond market. In the past three weeks, the yield on the benchmark 10-year Treasury note has soared to 5.1% from 4.7%, a huge jump for bond yields, which move in the opposite direction of their prices. Indeed, on Thursday, the Treasury market saw its worst price declines in more than two years.
Bond yields now are at their highest levels in a year. There were other troubling signs last week, including bearish talk of Treasury yields climbing to 6.5% in the next five years by longtime bond bull Bill Gross, manager of giant Pimco Total Return Fund.
How Bonds Affect Stocks
Why do bonds matter so much? Rising bond yields put pressure on the economy, by making all kinds of debt more expensive, including home mortgages and corporate loans. At the same time, higher yields make bonds more attractive to investors and thus make stocks relatively less attractive.
Just as important, if the debt markets run into difficulties, that could bring to a halt the rash of mergers that have been running at record levels and have been a key underpinning to the stock market. Higher rates drive up the costs of the heavy borrowing that leveraged-buyout specialists rely on to finance takeovers. If the appetite for acquisitions wanes, it likely will put a damper on the overall stock market, analysts say.
"Today the bond market and the stock market are more intertwined" because of the high level of leveraged buyouts, or LBOs, says John Linehan, a portfolio manager for T. Rowe Price Value Fund in Baltimore. "The [stock] market needs the fuel of cheap debt [because] these LBOs need the fuel of cheap debt."..."
Below is a graphic from the article showing the trend of bonds compared to the trend of the stock market.
The rest of the article can be found at the Wall Street Journal under the title What's Behind the Stock Market Jitters?.