The stock market selloff is all about the 'pain trade' in bonds
By Josh Schafer Reporter forYahoo Finance
Wed, October 4, 2023 at 5:30 AM
Stocks continued their recent selloff on Tuesday amid a slew of concerning headlines for investors.
Labor market data showed job openings unexpectedly jumped in August. An ongoing labor strike in the auto sector is intensifying. And surging oil prices are within a few percentage points of 2023 highs.
But as the wall of worry builds in markets and the S&P 500 back-pedals, market strategists tell Yahoo Finance the story behind the action is all about the bond market. Investors fear a hot economy could prompt the Federal Reserve to raise interest rates again.
"Yields are the biggest pain trade for all types of investors right now," eToro US investment analyst Callie Cox said. "Interest rates fundamentally change how people think about their money and investing. And you're seeing that happen live right now."
On Tuesday, the yield on 10-year Treasury notes touched 4.8%, its highest level since 2007.
All else equal, higher interest rates make "safer" investments like money market funds, which invest in things like Treasury bonds, look more attractive to investors, Cox said. That flight to safety has grown increasingly appealing as investors digest the "higher for longer" view that carried through Fed Chair Jerome Powell's press conference on September 20.
"We need policy to be restrictive so that we can get inflation down to target," Powell said during the press conference. "And, we're going to need that to remain to be the case for some time."
The Fed's Summary of Economic Projections released ahead of Powell's comments showed officials see rates coming down less than previously forecast in both 2024 and 2025. At the end of 2026, interest rates are still projected to be higher than the so-called neutral rate of interest, which Fed officials expect to prevail over the longer run.
The S&P 500 slid more than 1% on the day of the Fed's announcement and has continued tumbling since.
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