Monthly Market Update: Treasury Yields Rise Following the Fed’s September Rate Cut

Monthly Market Update: Treasury Yields Rise Following the Fed’s September Rate Cut

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Monthly Market Summary

• The S&P 500 Index returned -0.9%, outperforming the Russell 2000 Index’s -1.4% return. Three of the eleven S&P 500 sectors traded higher, with Financials and Communication Services both gaining more than +1.5%. The remaining eight sectors all traded lower by more than -1% during the month.
• Corporate investment-grade bonds produced a -3.2% total return as Treasury yields rose, underperforming corporate high-yield’s -1.0% total return.
• International stocks traded lower. The MSCI EAFE developed market stock index returned -5.3%, while the MSCI Emerging Market Index returned -3.1%.

Stocks End 5-Month Winning Streak with First Loss Since April

Stocks finished October lower as investors navigated Q3 earnings, the upcoming election, and uncertain Federal Reserve policy. The S&P 500 posted its first monthly loss since April, lowering its year-to-date return to +20.7%. Large-cap stocks slightly outperformed small-cap stocks, but most investment factors produced similar returns.

In the bond market, Treasury yields climbed as investors considered the possibility that the Fed may not cut interest rates as much as previously expected. Concerns about fiscal spending also drove Treasury yields higher, with expectations for continued high government spending regardless of the election outcome. With yields rising sharply, bonds traded lower for the first time in six months.

Treasury Yields Spike After the Fed’s September Rate Cut

The bond market has experienced several large swings this year. The 10-year Treasury yield began the year around 3.90%. However, as inflation rose early in the year, the 10-year yield climbed to 4.70% by late April. Yields then reversed over the summer as falling inflation and rising unemployment fueled expectations for deeper rate cuts.

Between late April and mid-September, the 10-year yield dropped by over -1.00%. It hit a low of 3.62% the week of the Fed’s September meeting, when the central bank cut interest rates by -0.50%. It may seem counterintuitive, but since the Fed’s September meeting, Treasury yields have risen sharply. The 10-year Treasury yield ended October at 4.28%, rising by over +0.65% in one and a half months.

What’s behind this year’s bond market swings? Volatile economic trends and uncertain Fed policy. Two key data points have increased volatility: inflation surged early in the year before easing over the summer, while unemployment rose from 3.7% in January to 4.3% in July, then fell to 4.1% in September.

The Fed aims for stable prices and full employment, but conflicting data has complicated its interest rate decisions. There’s general agreement that the Fed should continue to lower interest rates, but there’s debate about how quickly and how much. The recent increase in Treasury yields reflects expectations for fewer interest rate cuts. As we’ve seen this year, that outlook could change in the coming months.

Disclosures

Past performance does not guarantee future results. The performance information shown herein is based on total returns with dividends reinvested and does not reflect the deduction of advisory and/or other fees normally incurred in the management of a portfolio.

Stock performance and fundamental data is based on the following instruments: SPDR S&P 500 ETF (SPY), SPDR Dow Jones ETF (DIA), iShares Russell 2000 ETF (IWM), iShares Russell 1000 Growth ETF (IWF), iShares Russell 1000 Value ETF (IWD), iShares MSCI EAFE ETF (EFA), iShares MSCI Emerging Markets ETF (EEM), Invesco QQQ Trust (QQQ).

Fixed Income performance is based on the following instruments: iShares Core U.S. Aggregate Bond ETF (AGG), iShares Investment Grade Corporate ETF (LQD), iShares National Muni Bond ETF (MUB), iShares High Yield Corporate ETF (HYG).

Fixed Income yields and key rates are based on the following instruments: Bloomberg US Aggregate, ICE BofA US Corporate, ICE BofA US Municipal Securities, ICE BofA US High Yield, 2 Year US Benchmark Bond, 10 Year US Benchmark Bond, 30 Year US Benchmark Bond, 30 Year US Fixed Mortgage Rate, US Prime Rate.

Commodity prices are based on the following instruments: Crude Oil WTI (NYM $/bbl), Gasoline Regular U.S. Gulf Coast ($/gal), Natural Gas (NYM $/mmbtu), Propane (NYM $/gal), Ethanol (CRB $/gallon), Gold (NYM $/ozt), Silver (NYM $/ozt), Copper NYMEX ($/lb), U.S. Midwest Domestic Hot-Rolled Coil Steel (NYM $/st), Corn (CBT $/bu), Soybeans (Chicago $/bu).

U.S. Style performance is based on the following instruments: iShares Russell 1000 Value ETF (IWD), SPDR S&P 500 ETF Trust (SPY), iShares Russell 1000 Growth ETF (IWF), iShares Russell Mid-Cap Value ETF (IWS), iShares Russell Midcap ETF (IWR), iShares Russell Mid-Cap Growth ETF (IWP), iShares Russell 2000 Value ETF (IWN), iShares Russell 2000 ETF (IWM), iShares Russell 2000 Growth ETF (IWO).

U.S. Sector performance is based on the following instruments: Consumer Discretionary Sector SPDR ETF (XLY), Consumer Staples Sector SPDR ETF (XLP), Energy Sector SPDR ETF (XLE), Financial Sector SPDR ETF (XLF), Health Care Sector SPDR ETF (XLV), Industrial Sector SPDR ETF (XLI), Materials Sector SPDR ETF (XLB), Technology Sector SPDR ETF (XLK), Communication Services Sector SPDR ETF (XLC), Utilities Sector SPDR ETF (XLU), Real Estate Sector SPDR ETF (XLRE).

Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.

We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.

More relevant articles by Financial Synergies:

• Chart of the Month | Uncharted Territory: Understanding This Economic Cycle
• Feeling Déjà Vu Around the Fed and Inflation
• Monthly Market Update: Global Markets Trade Higher After April Sell-Off

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