Latest / Markets with Megan: A Quick Financial Markets Update / Bond Blowup: What’s Happening Now? | S2 E045 | 05-21-25
Transcript
- 0:00Megan Horneman: The Treasury market is creating quite a bit of volatility in the equity markets.
- 0:04Megan Horneman: This week it's Wednesday, may 21st, and this is Markets with Megan.
- 0:08Megan Horneman: If you like this podcast, please hit that alarm bell.
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- 0:13Megan Horneman: But today we want to talk about the action we've been seeing in the Treasury market and how that's impacting what we're seeing in the equity markets.
- 0:22Megan Horneman: This all started last Friday with Moody's, which is a credit rating agency, downgrading the US Treasury debt from its AAA status.
- 0:31Megan Horneman: Now, when you downgrade any kind of debt, typically people will demand more yield in order to invest in that, and we've slowly been seeing yields rise.
- 0:40Megan Horneman: You combine that with what we're seeing going on on Capitol Hill, with the trying to get the Tax Cuts and Jobs Act extension passed, and you're seeing a lot of uncertainty on what that means for US Treasury debt.
- 0:54Megan Horneman: Now Moody's downgraded our debt because of the fact that our deficit continues to get worse and there is no trajectory that looks better, and it doesn't look like we have much fiscal discipline either, so it downgraded its debt.
- 1:08Megan Horneman: This is the third rating agency to downgrade the US credit rating.
- 1:12Megan Horneman: Now what we've seen this week alone is because of that, 10-year yields are up about 10 basis points just in the past three trading days.
- 1:20Megan Horneman: 30-year bonds are up about 12 basis points, so you're seeing this impact more in longer-term yields.
- 1:27Megan Horneman: Now we had the first test to the demand of our treasury debt today when we got the 20-year bond auction.
- 1:36Megan Horneman: The treasury issued $16 billion worth of 20-year bonds and it came in at a yield of 5.047, which is the highest yield we've seen since they actually started reissuing the 20 year bond.
- 1:49Megan Horneman: Typically, when these come to auction, we've seen the yield come in below expectations, and this one came in above the expectations.
- 1:57Megan Horneman: So this is exacerbating this sell off in yields and it's spilling over into the equity market, because equities don't like volatility in treasuries and they surely don't like significantly moves higher in treasuries.
- 2:10Megan Horneman: As we can see today, we're seeing some of those interest rate sensitive sectors take the biggest brunt of this things like real estate utilities, but you're also seeing sectors like technology that have high price-to-earnings multiples that are also getting hit today.
- 2:24Megan Horneman: Now, this is still in the early stages.
- 2:31Megan Horneman: There's a lot that's going to happen between now and when this Tax Cuts and Jobs Act bill ends up coming for a vote.
- 2:34Megan Horneman: There'll be a lot of volatility from an interest rate perspective because of that.
- 2:38Megan Horneman: This is why we don't recommend investing in super long-term bonds.
- 2:42Megan Horneman: We do have a deficit problem.
- 2:44Megan Horneman: We have a net interest problem.
- 2:46Megan Horneman: That's going to materialize there in those longer-term bonds.
- 2:49Megan Horneman: Short to intermediate-term bonds are less sensitive to interest rate risk, so that's where we would focus in fixed income.
- 2:56Megan Horneman: That's all we have today.
- 2:58Megan Horneman: We'll be back with more Markets with Megan.
- 2:59Megan Horneman: If you want to see a history of our podcast, you can go to marketswithmeganfm.
- 3:03Megan Horneman: Thank you.