By Matthew C. Klein, Economics Correspondent, The Washington Post
The 10-year Treasury yield—the most closely watched piece of data in the financial news cycle, bar none—may be ticking up but it has been steadily going down for years. In October, there was an average decline of about 4 basis points a day. In fact, we’ve been in a full-blown bear market of bond-yield declines for the last three years, which reflects the mild recession we’ve had since the end of 2015. With unemployment at a 17-year low and real household incomes at a 10-year high, it’s no surprise that bond investors are all but begging to get out of this long, slow, general market drift.
It’s easier to get out of any market, of course, once bond prices are moving up. For bond-indexed vehicles like the Vanguard Total Bond Market Index Fund, the amount of money pouring out of these funds has been more than offset by buyers coming in. Those who are buying bonds are being compelled to increase the price by inflating the yields. The Treasury has been raising interest rates to discourage people from buying bonds but the rising price of bonds isn’t constrained by the rise in the yield.
That’s where the 10-year yield is. The rising price of bonds along with the rise in yields has pushed the stock market toward record highs. As I write, the S&P 500 is less than a percentage point off an all-time high reached last month. That’s despite a series of revenue warnings this week from companies like Amazon and Twitter, two examples of why people don’t think U.S. economy is growing much.
And yet, Wall Street loves it. It’s not just that the market likes the S&P 500’s level of valuation — it’s the fact that it’s the best it’s been since the start of the millennium.
Of course, more and more people think this is a funny set-up. We all know that stock prices are overvalued. So who is it that feels good about this?