U.S. households have significantly increased their holdings in the U.S. Treasury market as the Federal Reserve continues to raise interest rates. According to Torsten Slok, chief economist at Apollo Global Management, these holdings have risen from less than $1 trillion to approximately $2.5 trillion since the Fed began its rate hikes in 2022. This surge in holdings represents the highest level in the past 25 years.
Slok notes that this increase can be attributed to the fact that U.S. households and real money are finding the current levels of U.S. yields attractive. This insight implies that investors are drawn to the opportunities presented by the rising yields.
One specific focus on Wall Street has been the rise of the 10-year Treasury yield, which has reached nearly 4.5% in recent sessions. This level is the highest it has been since late 2007 and has had notable effects on the market. Rate-sensitive sectors, such as big technology stocks, experienced sharp sell-offs after the Federal Reserve hinted at keeping policy rates higher for a longer period than previously anticipated.
Although there was a slight pullback in the 10-year Treasury yield on Friday, which offered some relief and a minor boost to stocks, equities were still on track for significant losses for the week.
The Fragile Consumer Discretionary Sector
The consumer discretionary segment of the S&P 500 index has taken a hit this week, declining by 5% at last check on Friday. This downward movement suggests that investors may be concerned about the vulnerability of companies that focus on luxury goods, such as vehicles, furniture, vacations, and other nonessential items, in the face of a potential economic slowdown.
Luxury Stocks Feeling the Pressure
Tesla Inc. (TSLA) shares have dropped over 7% for the week, while Amazon.com Inc. (AMZN) shares have seen a decline of about 6.7%. Even other stocks in the "Magnificent Seven" group, which have been strong performers this year, are also experiencing losses since the beginning of the week.
Borrowing Woes for Consumers and Corporations
Higher borrowing costs not only impact consumers but also pose a threat to major corporations that have significant amounts of maturing debt in the coming years. Additionally, older securities with lower coupon rates in investment portfolios are now seen as less valuable.
Bond Market Struggles
What was once a prosperous year for a wide range of bond investments has now been marred by rising yields. According to FactSet, the benchmark Bloomberg U.S. Aggregate index is on track for a negative return of -0.6% for the year through Friday and a staggering -14.4% return over the past three years.
The iShares Core U.S. Aggregate Bond ETF (AGG), an exchange-traded fund that mirrors the Bloomberg index, has also suffered a decline of 2.1% for the year through Friday.