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2023.09.28 00:54
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"Higher and Longer" Panic Continues: US Stocks and Bonds Plunge, Marking the Worst Month of the Year

The S&P 500 index has fallen more than 5% since September, leading to its first quarterly decline in a year. The 10-year Treasury yield may face its largest monthly increase in a year.

The market continues to digest the expectation of "longer and higher" interest rates from the Federal Reserve, and US stocks and bonds are heading for their worst month of the year.

The S&P 500 index has fallen more than 5% since September, dragging the index into quarterly decline for the first time in 12 months.

The yield on the 10-year US Treasury bond has been rising steadily, with a 7 basis point increase on Wednesday, reaching its highest level since 2007. It has risen by 50 basis points this month, experiencing the largest monthly increase in a year.

Mark Dowding, Chief Investment Officer of BlueBay Fixed Income at Royal Bank of Canada, said:

"People are starting to realize that longer and higher actually means long-term rate hikes. This realization has been hurting people's sentiment."

At the beginning of this month, futures traders bet that interest rates would reach around 4.2% by the end of 2024, but now they are betting on rates reaching 4.8%. Last week, the Federal Reserve paused its rate hikes and kept the benchmark rate stable in the range of 5.25%-5.5%, but the dot plot indicates that there will be further rate hikes this year.

Kevin Gordon, Senior Investment Strategist at J.P. Morgan Asset Management, said:

"The market has been consistently wrong about the Fed's policy this year. For most of this year, the market expected significant rate cuts... Now people generally think that 'maybe the Fed really does want to continue raising rates.'"

The surge in US bond yields has reduced the attractiveness of stocks relative to bonds and increased corporate borrowing costs. The expectation of "longer and higher" interest rates has had a negative impact on the stock market.

So far this year, the S&P 500 index has still risen by 11%, but this is mainly supported by the "Big Seven" technology giants. Under the wave of AI investment, the stock prices of these "Big Seven" have skyrocketed, with a total market value reaching $11.5 trillion at one point, equivalent to three times the size of the German economy.

However, under the pressure of high interest rates, the AI engine has stalled, and the S&P 500 Information Technology Index, which is more focused on large-cap tech stocks, has fallen by over 10% from its peak in July.

Source The impact is also felt in the corporate bond market, with the average interest rate for junk bonds in the US rising from 8.5% to nearly 9% this month, surpassing the increase in government bond yields.

Sonal Desai, Chief Investment Officer of Franklin Templeton Fixed Income, commented:

It seems that the market finally agrees with our view that we are not on the brink of a recession.

A series of economic data that has been stronger than expected has led the Federal Reserve to lower its unemployment rate forecast and raise its growth forecast last week. The surge in oil prices has also put upward pressure on inflation, all of which suggests that the Federal Reserve may have to continue raising interest rates.