The predictable market may not persist for much longer. It is now a surety that the easy monetary policy adopted by the Federal Reserve could be on its way out. There is another threat as well- the copious US Treasury's supply may push up bond yields. Prices of stocks may be pushed down due to such factors. Signs of impending negativity are already present. Stock markets all over the world suffered heavy selling on February. This happened as investors were spooked up by signs of steeper inflation. Many people are apprehensive that the Federal Reserve could jack up the interest rates at a faster pace.
The Department of Treasury of the United States is anticipated to sell about $258 billion of debt during the third week of February. The list of issuances thus far includes auctions of about $28 billion in the 2-year notes at a 2.255 percent high yield. It is the highest from August 2008. This, along with the publication of better than anticipated inflation data, witnessed the two-year Treasury yield hit the highest level in almost 10 years.
The stock market could go steeply south if there is inadequate demand for a bigger supply of the Treasury's. Many analysts believe that the markets have adjusted to terms carrying higher rates. The markets have gotten used to not only the inflation and the Federal Reserve being higher than anticipated but also the Treasury supply. Since there are the big tax cuts and large deficits, there is a certainty of excellent Treasury supply in America.
Greater bond yields at the time of rising inflation and interest rates could push investors to move money from stocks and reinvest in bonds. These conditions threaten the market as corporate profit margins are eaten away by stronger inflation. Greater interest rates means higher borrowing expenses for both businesses and investors.
According to analysts, it is acceptable to endure up to 2.5 percent inflation if there is an increase of yields and the time of markets worry less about deflation. Yields, however, could move slowly up when inflation moves up quicker than anticipated. This could also happen if Treasury supply is in excess and demand is too low. These are worrying scenarios of the stock market. It should be noted that the present situation is not that bad where investors could make the decision on selling all their stock holdings.