Investors are piling cash into the bond market at a record pace, suggesting markets expect the Federal Reserve to maintain its "higher for longer" interest-rate stance even as inflation softens.
Bank of America's closely tracked weekly Flow Show report indicates investors are on pace to plough more than $200 billion into Treasury bond funds this year, having placed more than $127 billion so far.
That's as the Fed's rate hikes lift short-term yields to multiyear highs and benchmark 10-year note yields hold at the 4% level -- nearly triple the current 1.54% dividend yield on the S&P 500.
The Flow Show report also suggested that investors were taking money out of equity-market funds amid the August pullback, which has seen the S&P 500 fall 2.62%. The report shows some $1.6 billion of outflows.
LSEG Lipper, meanwhile, reported a net inflow of $18.4 billion into money-market funds for the week ended Aug. 9, with equity redemptions at $8.6 billion. Some $217 million, Lipper said, found its way into U.S. investment-grade funds.
The demand for Treasurys, in fact, was evident earlier this week during an auction of $38 billion in new 10-year notes at 3.999%, which drew increased demand from both foreign and domestic investors even after last week's controversial downgrade of the U.S.'s triple-A debt rating by Fitch. The latest auction was a $3 billion increase from the last debut 10-year in May.
In the latest sale, investors bid $2.56 for every $1 of 10-year notes on offer from the Treasury, auction data indicated. That's a firmer tally than the 2.53 so-called bid-to-cover ratio recorded at the last auction in July, when the yield was 3.857%. The ratio was the highest since February of last year.
Prices and yields in the bond market move in opposite directions, making today's paper cheaper than it was in early July.
Foreign buyers, the data indicated, took down around 72.2% of the sale, down from the 79.5% figure reported in July -- which was the strongest uptake in more than two decades -- but firmly ahead of the near-term average of around 67.7%.
Investors expect higher rates for longer
The renewed Treasury appetite, however, may reflect conditions in the broader economy that won't support stocks heading into the back half of the year.
Wall Street's early Thursday rally, sparked by a modestly softer-than-expected reading for both headline and core inflation over the month of July, faded into the close of the session -- on relatively heavy August trading volumes.
Investors appear worried that the Federal Reserve will likely need to keep rates higher, and for a longer period, to fully tame consumer-price pressures in a hot economy.
"Whether we raise another time, or hold rates steady for a longer period -- those things are yet to be determined," San Francisco Fed President Mary Daly told Yahoo Finance late Thursday. "It would be premature to project what I think would happen because there's a lot of information coming in between now and our next meeting."
The Atlanta Fed's GDPNow tool, a real time indicator of U.S. growth, suggests the economy is growing at a 4.1% clip, up from its 3.9% estimate earlier in the month. Weekly jobless claims data, meanwhile, suggest the labor market remains historically tight, adding to concern that wage pressures will reaccelerate into the final months of the year.
CME Group's FedWatch, while suggesting a 90.5% chance that the Fed holds its benchmark lending rate steady at between 5.25% and 5.5% next month in Washington, is also pricing in a 25% to 30% chance of a final rate hike in either November or December.
Treasury yields were higher in the overnight session, as well, following a soft auction of $23 billion in 30-year bond yesterday that drew disappointing demand from both domestic and international investors, despite a yield of nearly 4.2%.
Benchmark 10-year notes were marked at 4.09%, around 3 basis points higher compared to last night's close, while 2-year paper traded at 4.814%.
Corporate-earnings growth starting to fade
Corporate-earnings growth, meanwhile, is starting to fade, with collective S&P 500 profits estimated to have fallen 4.2% to a share-weighted $445.1 billion over the three months ended in June.
Around 50 companies have given negative near-term guidance, according to Refinitiv, with just 24 indicating positive surprises for the coming quarter.
September-quarter earnings, meanwhile, are forecast to rise just 0.9% to around $460.1 billion, with the overall market priced at 19.1 times 12-month forward earnings. That level is considered expensive by historic standards and could suggest near-term weakness.
Market reaction to positive earnings, according to JPMorgan data, has been muted, with stocks that beat Wall Street forecasts outperforming by only 0.1% a day after they've reported.
"While Q2 earnings results have generally been better than we and most market-watchers anticipated, we do not think they have been good enough to push stocks higher over the next month or two," said LPL Financial's chief global strategist, Quincy Krosby.
"Estimates have held up well, but stocks likely priced in strong results with gains in June and July. The Federal Reserve (Fed) may be our next catalyst, with the central bank confab in Jackson Hole (later this month)."
- Action Alerts PLUS offers expert portfolio guidance to help you make informed investing decisions. Sign up now.
