U.S. stocks extended declines Wednesday amid higher Treasury bond yields as investors grappled with the prospect of a faster pandemic recovery that could boost economic growth but also trigger near-term inflation.
Winter storms in Texas, and large parts of the southwest, blunted the headline ISM Services Sector reading for the month of February, which fell 3.4 points to 55.3 but remained well above the level that separates growth from contraction. Rising commodity prices and other input costs, however, lifted the 'prices paid' portion of the index to the highest levels in more than twelve years.
And with the U.S. administering around 1.8 million vaccine doses each day, and new cases down from 20% from the previous weeks to around 50,000 per day, investors are now starting to bet on a late Spring re-opening of the broader economy that could have profound affects on jobs, growth and, potentially, consumer price inflation.
The so-called breakeven rate between five-year Treasury bonds and five-year inflation protected securities, a key market gauge for consumer price increases, hit a 2008 high of 2.5% Wednesday -- firmly ahead of the Fed's 2% inflation target.
Benchmark 10-year Treasury bond yields, meanwhile, jumped to 1.485% in mid-morning trading, but held under the key 1.5% level, after a weaker-than-expected reading of private employment growth from ADP of 117,00 for the month of February.
The yield gains have also put the difference, or spread, between 2-year and 10-year notes at around 134 basis points, the widest since early 2017 and a classic market signal for economic growth and faster inflation - a likely outcome from the planned $1.9 trillion stimulus bill that passed through the Democratic-controlled Congress late last week.
"Markets may take the job markets report as a somewhat backward looking indicator at this stage given that the US$1.9 trillion stimulus bill making its way now through the Senate," said ING's regional head of Americas research Padhraic Garvey.
"Against that backdrop, even if price action has stabilized, the ongoing steepening of curves yesterday signals that markets are heeding the Fed's endorsement of a steeper curve and leaving the long end with little protection," he added. "Potential targets for further yield increases have been staked out already in recent weeks and it appears only a matter of time before a 1.6% in the 10-year is revisited."
Higher 10-year note yields, which was briefly surpassed 1.6% during last week's bond sell-off (prices and yields move in opposite directions), could prove crucial to stock investors focused on dividend yields.
According to Bank of America research, around 64% of S&P 500 stocks have a dividend yield that is higher than 1.4%, but that figure fall s to 50% at 1.5% and 44% at 1.75% respectively.
Tech stocks - many of which are either cash-rich or growth-focused and thus sensitive to interest rate changes - have borne the brunt of the interest rate market surge, with the Nasdaq down nearly 6% from its last record high on February 12.