Market Snapshot
By the Numbers
- The S&P 500, Nasdaq, and Dow Jones Industrial Average rose 2.6%, 3.9%, and 1.3%, respectively, in August. Year-to-date, they have gained 12.3%, 13.5%, and 10.7%, respectively.
- International developed markets returned 1.8% based on the MSCI EAFE Index in U.S. dollar terms, while emerging markets returned 3.2% based on the MSCI EM Index.
- The 30-year Treasury yield reached its highest level since 2007, closing the month at 5.24%.
- The 10-year Treasury yield ended the month at 4.75%. The Bloomberg U.S. Aggregate Bond Index returned 0.4% for the month.
- Oil prices hovered in a range in August after climbing the previous month. Brent crude closed the month at $90.68 per barrel and WTI near $86.27 per barrel.
- The revision to second quarter GDP remained unchanged at an annual rate of 1.5%.
- The July jobs report missed expectations with a decline of -23,000 in payrolls compared to a forecasted gain of 80,000. Unemployment fell slightly to 4.1%.
Long-term interest rates are near multi-decade highs
One of the defining features of today’s investment environment is that interest rates have remained higher than many expected. The 30-year Treasury yield briefly surpassed 5.3% in August, a level not seen in almost 20 years. Similarly, the 10-year Treasury yield, around 4.8%, is close to its recent peak. This is important because, while interest rates can seem technical, they both affect and are a reflection of the economy.
Many factors can affect bond yields, so here is what to know about recent moves:
- Interest rates have risen in general this year not necessarily because of inflation, but due to positive growth trends and spending in areas like AI. This is why yields have risen even as the stock market has reached new all-time highs. This is in contrast to periods like 2022 when inflation caused rates to rise and the stock market to fall.
- Concerns about government debt levels are weighing on bond markets. The U.S. national debt has exceeded $40 trillion for the first time, with an annual deficit projected to reach $2.1 trillion. Heavily indebted countries, including Japan and across Europe, have seen the sharpest yield increases. The U.S. Treasury Department has also helped to intervene in global bond and currency markets, including supporting Japan’s bonds, in order to maintain a ceiling on Treasury yields.
- Global central banks are expected to raise rates. In the U.S., this is due to persistent inflation already running above the Fed’s 2% target, with the PCE price index at 3.7% year-over-year as of July. Fed Chair Kevin Warsh’s latest speech at Jackson Hole raised the odds of rate hikes (based on federal funds futures).
- A surge in corporate bond issuance is absorbing liquidity and demand for bonds, with issuance tied to artificial intelligence investment. Recent data from the Census Bureau shows that data center construction spending reached an annualized $75 billion in July. All of this competes with government bonds for investor demand.
- Most recently, bonds are also reacting to new strikes by the U.S. on Iran, which further affects oil prices. Brent crude has jumped back above $90 per barrel recently, which raises more questions about consumer prices in the coming months.
- Rising yields put downward pressure on bond prices. The Bloomberg U.S. Aggregate Index, a measure of the overall bond market, is now flat-to-negative on the year. At the same time, higher yields are positive for investors seeking income from their portfolios. The average yield on the Treasury securities sub-index is now 4.7%, well above the 2.2% average since 2009. So, bonds still play an important role in balanced portfolios.
Chart of the Month
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Data sources: Clearnomics, YCharts, The Wall Street Journal, Charles Schwab Asset Management, JPMorgan, Bloomberg, U.S. Energy Information Administration, U.S. Bureau of Statistics, The Economist, Congressional Budget Office, US Treasury Department, & US Federal Reserve.