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Why the big drop in bond yields ‘shocked everyone’ and sent stocks plunging

Stock market investors were spooked on Monday by a sharp move lower in Treasury yields amid growing concerns about increasing cases of COVID-19 globally, according to Phil Camporeale, portfolio manager at JPMorgan Chase & Co.

Camporeale, who manages JPMorgan’s $5 billion Global Allocation Fund, said in a phone interview on Monday: “We’ve come a long way” since the pandemic broke out. . But “a bearish move always surprises people.”

10-year Treasury yield
TMUBMUSD10Y,
1.212%

fell nearly 12 basis points Monday to 1,181%, according to Dow Jones Market Data. That was the biggest one-day yield drop since March 23, 2020.

JPMorgan’s Global Allocation Fund, which has a multi-tiered investment strategy, underweighted its stock in June due to a “clear signal” from 10-year Treasury notes that yields is decreasing, according to Camporeale. The decline over the past few months, he said, suggests it’s time to “synchronize your value trading against growth,” explaining that value stocks, such as consumer discretionary, financial and energy, which tend to do well when rates and bullish expectations emerge.

US stocks fell on Monday amid concerns about the growing spread of the delta variant of the coronavirus, with the Dow Jones Industrial Average
DJIA,
-2.09%

saw the steepest drop in the three major benchmarks. The blue-chip index fell about 2.1% in its biggest daily drop since October 28, 2020, according to Dow Jones Market Data.

Read: Why did the Dow drop on Monday? Economic growth is now a bigger concern than inflation.

The “cyclical” Dow tends to suffer the most when it comes to “reopening questions,” while the tech-heavy Nasdaq Composite
COMP,
-1.06%

There tends to be better fares in that environment, according to Camporeale. Nasdaq drops 1.1% Monday while S&P 500
SPX,
-1.59%

down 1.6%.

“We remain committed to reopening trade, we just cut our positions a little bit,” he said, adding that the Global Allocation Fund has also cut its share of government bonds.

Read: Yields on 10-year Treasury notes fall to 5-month low, touching 1.179 percent as delta market spreads

Judging from Treasury yields, concerns about US economic growth may be overblown, according to Camporeale.

The US economy is in better shape than it was in mid-February, when 10-year Treasuries traded at similar levels and vaccination rollout was still in the early stages, according to Camporeale. The majority of Americans are over the age of 65 today Fully vaccinated, which helps keep severe cases of Covid-19 and hospitalizations low, he said, adding that initial jobless cases are now much lower. more in february as the economy continues to recover.

Read: US unemployment rate drops to pandemic low of 360,000, but businesses still struggle to find workers

While Camporeale expects that U.S. growth may peak in the second quarter, “that doesn’t mean you go from peak to recession,” he said. “We remain confident of GDP growth above trend through the end of the year.”

Scott Wren, senior global market strategist at Wells Fargo Investment Institute, said in an interview Monday that he believes the yield on 10 Treasuries is too low based on the company’s outlook. For economy.

Wells Fargo expects the U.S. economy to grow “very strongly” about 7% this year and to grow about 5% in 2022, according to Wren. He said he expects 10-year Treasury yields to rise to around 2% by the end of the year.

“The likelihood of shutdowns that could significantly depress the economy seems to be a low probability right now,” Wren said.

https://www.marketwatch.com/story/why-a-big-drop-in-bond-yields-freaks-people-out-and-sends-stocks-tumbling-11626730862?rss=1&siteid=rss | Why the big drop in bond yields ‘shocked everyone’ and sent stocks plunging

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