Concerns that the rates trade may cause stock prices to fall again have Wall Street on high alert. Roughly 25 basis points have been added to the 10-year Treasury yield (~TNX) in only the past 10 days. It has recently been around 4.32%, which is close to what Morgan Stanley CIO Mike Wilson has said could be a crucial threshold for stock investors.
Wilson informed clients on Sunday that they should keep an eye on the 10-year US Treasury yield at 4.35% for any indications that equity market sensitivity to interest rates could rise.
Compared to 62% in December, 40% of managers now anticipate lower bond yields, according to the March Global Fund Manager Survey issued on Tuesday by Bank of America. Expectations for yields to decline have never been lower than they are right now.
Large caps, as pointed out by Wilson, have recently been less rate sensitive. "Small caps are likely to show more rate sensitivity than large caps on a move higher in yields," according to him.
According to Wilson, the recent expansion of the market has been driven by the strength of large caps. As a result, the S&P 500 (~GSPC) has remained close to record-highs, even if the market is reducing its expectations on rate reduction by the Federal Reserve. Recent interest has focused on Materials (XLB) and other related sectors, while the Russell 2000 small cap index (^RUT) has lagged behind.
If rate uncertainty persists, it will have a critical impact on the equities markets. A number of market analysts have predicted that, for the stock market rally to reach its full potential, investors will want greater certainty regarding the Federal Reserve's interest rate policies. On Wednesday, the bank will reveal its next policy move.
It is unlikely that the markets will hear about a reduction in interest rates, but the Summary of Economic Projections will provide investors a better idea of the Federal Reserve's thinking.
The "dot plot," which shows the probable future paths of interest rates according to policymakers, is part of the release. Officials from the Federal Reserve predicted three interest rate decreases this year in December, according to the dot plot. Although there has been no indication of a slowdown in the economy and multiple inflation data that were hotter than expected, experts have cautioned that the Fed may predict fewer cuts.
"The potential removal of an expected cut would be taken as hawkish by the market, putting upward pressure on rates and the [US dollar], all else equal," stated the rate strategy team of Bank of America in a research note on Wednesday.
Kristy Akullian, a senior investment and portfolio solutions strategist at BlackRock, recently spoke with Yahoo Finance Live and said that market reactions to changes in expectations for Fed rate cuts have probably already been "priced in." Still, sectors not directly related to large-cap stocks may experience some discomfort.
stay turned for development