The determination of the US Fed to leave interest rates higher for longer has led to widespread bond selling. The selling of long-term bonds especially has caused the interest curve to experience bearish steepening.
Rise in selling of bond yields
Investors’ reaction to the US Federal Reserve’s (Fed) intentions to keep interest rates higher for a long time is being translated into downward pressure on stock markets.
The interest rate curve is currently experiencing bear steepening as a result of the significant increases in bond yield selling. This is particularly true of the selling of longer term bonds.
Bear steepening is when the yield curve widens because the long-term interest rates are increasing at a faster rate than short-term rates. This is what is happening now in the market Until now, the yield curve was inverted ( long term yields lower than the short end) for a long time. This is considered to be atypical and is interpreted as a precursor to an economic recession.
However, the US economy has been showing no indications of slowing down recently despite difficult US economic data and high interest rate levels. Therefore, in a strong economic environment, the interest rate curve has started to normalise. This results in higher market interest rates (yields on longer duration bonds).
US government funding in focus
The uncertainty around a potential federal government shutdown is another factor affecting market confidence. If this happens, it would harm the nation's credit, according to the rating agency Moody's. The Saturday deadline is drawing near, and members of Congress are attempting to negotiate a compromise that will at least temporarily extend government financing.
Moody's warning comes just a month after Fitch downgraded the US by one notch over a debt ceiling crisis. In this context, Moody's is the last of the major agencies still holding the US the main triple 'A' rating.
The US Dollar is strengthening against its peers
As a result of all of the above, the risk sentiment among investors is gradually worsening. Investor sentiment is reflected in the strengthening of the US Dollar against all its peers (positive correlation with interest rates) and in the collapse of stock market indices.
The Nasdaq index, which is the most sensitive to interest rate changes, has broken below the bullish trend line that has been in place since the beginning of the year. It is currently forming a head and shoulders pattern that if confirmed (when traded below the neckline) would have a bearish projection of around 9%.
TECH100 monthly chart, September 27, 2023. Source: CAPEX.com WebTrader.
Key Takeaways
- The stock market is under pressure as the Fed seems determined to leave rates higher for longer.
- The interest rate curve is experiencing “bear steepening” due to an increase in bond selling.
- The US economy continues to show signs of strengthening.
- Investors are monitoring developments in US government funding.
- Investors’ risk sentiment is deteriorating.
- The US Dollar is strengthening against its peers.
- The Nasdaq index has broken the bullish trend line downwards.
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Sources: Bloomberg, Reuters
