Bond traders are at it again, pushing up Treasury yields and signaling that the Federal Reserve was too heavy-handed when it cut interest rates by half a percentage point last month. The recent rise in yields has put pressure on the stock market – and particularly on the real estate-related names in our portfolio. The 10-year Treasury yield – which influences all types of consumer credit, including mortgage rates – rose again on Wednesday, hitting a session high of 4.26%. That's a level not seen since late July, when yields began falling in anticipation of the Fed's rate cut on September 18. Since then, however, the yield on 10-year government bonds has continued to rise. At the shorter end of the yield curve, the 2-year chart follows a similar pattern. US10Y US2Y 3M Mountain Three-Month Performance When the Fed began cutting interest rates, the hope was that shorter-dated Treasury bonds would decline faster than longer-dated Treasury bonds, providing relief to borrowers and investors. That hasn't happened recently. The 2-year and 10-year yields have recently moved up together. Interest rates are like gravity for stocks – the higher the interest rates, the more competition there is for investment money. Elevated, risk-free Treasury yields are becoming a tempting opportunity to generate returns compared to the volatility of stocks. A higher 10-year Treasury yield also stops mortgage interest relief. The average 30-year fixed-rate mortgage, while down more than a percentage point from a year ago, has increased for three weeks in a row. In Freddie Mac's most recent weekly survey, the 30-year fixed rate was at 6.44%. The Fed's rate cut represents an easing of monetary policy that allows for faster and easier economic growth and makes debt more affordable. The flip side of this dynamic is that a hotter economy also increases the likelihood that inflation will rise again, just as it has begun to moderate. Bond traders are worried about a resurgence in inflation as economic data has improved since central bankers met in September. According to the CME FedWatch tool, market odds for a quarter-point Fed rate cut next month remain fundamentally solid. But after that, the chances of a reduction in December dwindle. However, a problematic recovery in inflation is not what we are calling for, nor is it what we are basing the club's investment decisions on. Another dynamic driving bond yields higher is concern about what will happen to the national debt and trade deficit under a new presidential administration. Whether the rise in yields is a bet on next month's election or reflects a view that fiscal policy will remain accommodative regardless of who wins is unclear. Both presidential candidates seem to agree on one point: the cost of living is too high. A large, unavoidable item on consumers' balance sheets is housing costs, which have been one of the strongest areas of inflation. For house prices to fall, we need more housing and lower mortgage rates to incentivize builders and motivate sellers and buyers. Many potential sellers are stuck with historically low mortgage rates and are hesitant to move, driving up home prices. Potential buyers are reluctant to pay higher home prices on top of increased mortgage interest rates. Increased real estate formation due to Fed rate cuts is key to our investment scenarios for three stocks in the Club portfolio: Stanley Black & Decker, Home Depot and Best Buy. Rising bond yields and creeping mortgage rates have offset the benefits of the Fed's easing measures, as we explained in Tuesday's small addition to Home Depot shares. Ultimately, however, fighting the Fed has proven to be a fool's errand in the long run – so we expect interest rates to fall at some point. Additionally, the management teams at Stanley Black & Decker, Home Depot, and Best Buy effectively implement the things under their control. Certainly they will benefit from lower interest rates – but interest rates alone are not the reason we hold positions. We are here because the fundamentals are improving, which will only come into greater focus as interest rates fall. Conclusion: The rise in bond yields is, in our view, unsustainable as shorter-dated Treasury yields will inevitably fall if the Fed applies enough pressure. The longer end of the curve should then fall and provide the necessary relief for mortgage interest rates. In this case, you want the price-sensitive stocks already on the books. Maybe we were too early. But we are ready. It would be a mistake to abandon these names now, just as the Fed has announced that the rate-cutting cycle will take effect. By the time it becomes clear that the 10-year yield has peaked, you will likely have missed a significant portion of the move. (Jim Cramer's Charitable Trust is long SWK, HD, BBY. See a full list of stocks here.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable foundation's portfolio. If Jim discussed a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION SET FORTH ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. THERE ARE NO fiduciary duty or duty IN RECEIVING YOUR INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
Cars drive past the Federal Reserve building on September 17, 2024 in Washington, DC.
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Bond traders are at it again, pushing up Treasury yields and signaling that the Federal Reserve was too heavy-handed when it cut interest rates by half a percentage point last month. The recent rise in yields has put pressure on the stock market – and particularly on the real estate-related names in our portfolio.