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Higher Treasury Yields Shake Markets

NEW YORK (TheStreet) -- Uncertainty over Federal Reserve stimulus has kept markets on edge this week, and has had adverse effects on large-cap dividend-paying stocks. The chart below is of iShares Dow Jones Select Dividend Index (DVY) over Guggenheim S&P 500 Equal Weight (RSP). This pair has flourished in the low-interest-rate environment as investors have sought out high-yielding assets. Similarly, because of the large-cap status, this pair has shown relative strength during periods of volatility. For the time being, this does not look to be the case, as the pair pushes lower alongside equity indexes.

On Wednesday, I posted an article highlighting the spike in the yield curve as treasuries sold off. Financial markets are forward thinking, and although the economic environment is not quite at the point of self-sustaining stability, the market sees it in the near-term future.

There may not be a stopping point to easing; more likely, the Fed will gradually wean markets off. They may slow bond purchases as employment picks up, and eventually let it diminish indefinitely. Next week is the Nonfarm Payrolls data, which should be indicative of the Fed's next move, and thus be cause for a pickup in equity market volatility. (In the charts below, the blue line is the 50-day moving average and the red is the 200-day moving average.)

iShares Dow Jones Select Dividend Index Over Guggenheim S&P 500 Equal Weight


The next pair measures financial market volatility across the world. The pair is CurrencyShares Australian Dollar Trust (FXA) over CurrencyShares Japanese Yen Trust (FXY). As large caps have lost their volatility measure efficacy, it benefits to turn back to a more traditional volatility measure. The yen, even in the face of heavy easing, is a solid measure of such volatility. It remains a safe haven along with the Swiss franc, and outperforms in times of uncertainty. Measured against the Aussie dollar, which is heavily influenced by world growth and commodities prices, it is a reliable measure of economic sentiment.

The pair has dipped lower as markets have broadly sold off and now stands at a lower level of support. U.S. GDP numbers and employment data next week should weigh heavily on this pair and determine whether global economic sentiment picks up or declines.

The last pair measures the Vanguard Total World Stock Index ETF (VT) over iShares Barclays 20+ Year Treas Bond (TLT). With markets becoming rattled over the potential slowdown of U.S. easing, this pair has seen consolidation. The issue is that an end to easing means the economic picture should be further improved. Although large caps have fallen alongside equity indexes, cyclical sectors have potential to outperform. The technology sector has vastly underperformed recently, and rotation out of higher-yielding dividend stocks could set up a reversal of the tech sector trend.

Along the same lines, financial stocks could get a boost from higher interest rates. With much of their business tied into rates, the return of a steeper yield curve could be a catalyst for a financial sector breakout.

Short-term volatility looks to be an issue, which is negative for equities, but as investors see a brighter economic horizon, this pair should get a boost higher.


Vanguard Total World Stock Index ETF over iShares Barclays 20+ Year Treasuries Bond

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a senior at Georgetown University earning a degree in Economics.

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