Dow tanks 1000 points, ends 4% lower as selloff deepens

US Treasury bond yields spike and the Dow Jones mini-crash

US Treasury bond yields spike and the Dow Jones mini-crash

Benchmark 10-year notes last rose 5/32 in price to yield 2.8312 percent. To drum up demand for that higher supply, rates may have to go up. The leak of a Federal Bureau of Investigation memo on Trump's Russian Federation "dossier" complied by a British ex-MI6 intelligence officer has also unnerved stock market bulls about rising political risk in Washington. The tools that helped pushed down rates, such as quantitative easing and short-term rate cuts, have done their job, he says. The Fed's key rate was "near zero for years". Even the European Central Bank is starting to change its monetary outlook. That's good for investors who buy those more lucrative, newly issued bonds.

This is all the more true since Deutsche Bank's woes mean Dr Mario Draghi, President of the ECB will be forced to delay his planned taper until December. Yields on long-term US government bonds have risen to four-year highs as economic growth and inflation pick up. Fed Fund futures now imply a 70 per cent probability of three rate hikes and 20 per cent odds of four rate hikes in 2018.

The Dow Jones Industrial Average .DJI fell 1,175.21 points, or 4.6 percent, to 24,345.75, the S&P 500 .SPX lost 113.19 points, or 4.10 percent, to 2,648.94 and the Nasdaq Composite .IXIC dropped 273.42 points, or 3.78 percent, to 6,967.53. The Fed fund rate is now about 1.25%, so it's still got a long way to go, but with at least three rate hikes priced into the market today, and the talk of a potential fourth hike, we could see an overnight rate of at least 2% by year end. Furthermore, the sharp rise in United States yields has come at a time when U.S. economic data releases have been more mixed, with the exception of January's USA employment report.

"I would not be at all surprised if bond yields get beyond 3% by the end of the year as a result of inflation".

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At prevailing bond yield of 7.56 per cent, one would then require 13.56 per cent (adding 6 per cent risk premium) on equity to make a switch from bonds.

Fears of inflation linked to a falling dollar are driving up bond yields and fueling expectations of potentially four interest rate hikes from the Fed this year. Gemma Wright-Casparius, manager of Vanguard Inflation-Protected Securities, which earns a Gold rating from Morningstar, shares Bartolini's view that rates will stay around where they are today.

The 10-day correlation between the S&P 500 index and yields on the 10-year note stands at a negative 0.79.

We don't see the current sell-off transcending into a bear market. Experienced bond investor Bill Gross of Janus Henderson reckons that we've now seen a turning point. Of course, it's hard to predict where markets might go, and there are some risks to these forecasts.

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The selling was fuelled also by profit-taking after a blistering January that saw several indexes strike record or multi-year highs, while energy firms were hit by a drop in oil prices. However, she doesn't see that happening. "At the margin, the buyer, the asset owner, is slightly enticed to put more money into fixed income than into the equity market". All that said, Wright-Casparius does think we're still in a lower rate for longer environment, with rates still at multidecade lows. That only happened eight times all of previous year, the fewest since 1964, according to LPL. So, what asset classes are worth investing in right now?

In the USA, recent economic data, including Friday's wage growth and inflation, has been positive.

"Over the last half a dozen of years we have been saying equity valuations can be higher because we are living in a low interest rate and low inflation environment but that's reversing a little bit and that's what we are staring at now", said Art Hogan, chief market strategist at B. Riley FBR in NY. Bartolini, meanwhile, doesn't think we're at the point where people will start moving wholeheartedly into bonds.

And while US Treasuries are "leading the charge", on speculation that the Federal Reserve may increase interest rates aggressively, the rise in bond prices is the "beginning of a global movement". "We expect it to play out over many months going forward, assuming the economic data holds together". Things may get rockier down the road, but for the foreseeable future, equities should still rise, albeit not in a straight line.

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Senior political figures from North Korea and U.S. - two of the countries at the centre of the political row - were both present. US Vice President Mike Pence also attended the Games opening ceremony but had no contact with the North Korean delegation.

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