This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why Stocks Zigged While Bonds Zagged

The Dow Jones Industrial Average plunged by more than 200 points on the last day of May. Fortunately, yields on Treasury bonds held up much better, and that could bode well for the direction of bank rates.

The environment for stocks and bonds

For the most part, recent weeks have seen a steady stream of encouraging economic news. In response, stock prices and bond yields have been rising.

Keep in mind that bond yields rise when bond prices fall. In effect, the stock market and the bond market often have different rooting interests -- the stock market benefits from the improved corporate earnings that come with economic growth, while bonds tend to thrive when a weak economy drives interest rates down.

Despite these different interests, stock prices rising and bond prices falling meant the two markets were in sync about the economic environment -- until they fell out of step at the end of May.

What happened at the end of May

While stock prices were falling on the last day of May, bond yields actually rose. The reason is that falling stock prices were not a function of diminished confidence in the economy. Just the opposite -- lately the fear has been that the economy has been improving so fast that the Federal Reserve might end its monetary easing programs sooner than expected.

Stocks benefit from the low interest rates those programs have brought. On the other hand, softening Fed intervention would be welcome news to customers of savings accounts and other deposits who have been waiting for years for interest rates to rise.

Looking for higher bank rates

Interest rate moves are seen first in actively traded bond markets, but they can take longer to trickle down to bank rates. However, the further bond yields move, the more likely it is that bank rates may follow. Since there's no telling when this might happen, here are three things you can do to be prepared:
  1. Keep an eye on current savings account rates. Not all banks react the same way to a rising interest rate environment, so shop actively to spot the banks that are on the leading edge of the movement toward higher interest rates.
  2. Check out online savings accounts. Online accounts frequently offer the most competitive rates, so expect them to be among the leaders in reacting to a rising rate environment.
  3. Be prepared to re-evaluate CDs. This may take a little longer to come about, but as interest rates rise, it may be time to start considering longer-term CDs again. Watch to see if the spread between longer and shorter CD rates starts to widen.

Because the stock market welcomes improved corporate earnings but does not want to lose the support of Fed monetary easing, its movements have evidenced mixed feelings about the recent strengthening of the economy. Interest rate markets have no such ambivalence -- if economic progress continues, expect bond yields to keep rising, with bank rates eventually following.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.99 0.00%
FB $102.01 0.00%
GOOG $682.40 0.00%
TSLA $151.04 0.00%
YHOO $27.04 0.00%


Chart of I:DJI
DOW 15,973.84 +313.66 2.00%
S&P 500 1,864.78 +35.70 1.95%
NASDAQ 4,337.5120 +70.6750 1.66%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs