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Yields Surge Following Robust Jobs Report

David Becker
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www.iforex.com
Yields Surge Following Robust Jobs Report

Friday’s robust jobs report, and subsequent market reactions, were almost exactly the same as they were a month ago. A sharp jump in U.S. Treasury yields pushed bond prices sharply lower and rate sensitive stocks with them. The two weakest sectors were dividend-paying utilities and REITS. Gold stocks tumbled with the metal on a combination of rising bond yields and a surge in the dollar to a new eleven-year high. The surging dollar pushed most other commodities lower as well. Banks and brokers jumped on Friday and were the best performers in a down market.

Banks and brokers generally benefit from rising rates especially at the long end of the interest rate curve. The steeper the interest rate curve, the easier it is for banks to lend at the long and borrow at the short end earning the difference. U.S. stocks sold off sharply in heavy trading. Utilities were the hardest hit. The Dow Jones Utility Average lost 3% and falling below its 200-day moving average for the first time in a year. This occurs on rising volume, which does not bode well for the sector.

Since utilities are closely tied to bond prices, they stand to lose the most when bond prices fall and yields jump. That breakdown in utilities also suggests that the threat of rising rates is being taken very seriously by traders.

The strong jobs report pushed bond yields sharply higher with the 10-year jumping to 2.24% on Friday which puts it at the highest level since last December. The yield has also broken a downward sloping trend line that has acted as resistance. To signal a major turn to the upside, however, the yield would have to clear the higher resistance line extending back to the start of 2014.

Looking forward, traders will focus on the March 17/18 Fed meeting where the Fed is now expected to remove the term patience from their playbook.

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