(New York)

As almost all investors are aware at this point, global markets, including the US, saw huge moves in yields yesterday. Trading of the 10-year US Treasury bonds saw yields as high as 3.22% today, sharply higher than just a week ago. The Dollar also soared. This led to a big selloff in stocks as well as major losses across emerging markets and US corporate bonds.

FINSUM: In our view, there are two ways to interpret this big move higher in yields. One is that it was just reactionary to new US economic data and that yields will stall again. The other is that the market has finally woken up to the reality that higher rates and yields are a certainty and that expectations need to be reset. We favor the latter view and think this could be a paradigm-shifting move that finally sparks losses in bonds and rate-sensitive stocks.

(Miami)

Anyone who has been even remotely watching the real estate market this year will note that the housing sector has been struggling. The well documented issues in the real estate market have caused housing stocks to have a very weak year, with multiple homebuilders recently hitting 52-week lows. This has made some worry that trouble in housing may be a leading indicator of an economic downturn to come. However, historically speaking, the opposite has been the case. Housing (combined with automotives) account for just 6.5% of GDP right now, the historical low end of their range, which is good news. Traditionally, it has been when housing gets to be a major part of the economy (e.g. 10% pre-Crisis) that trouble comes.

FINSUM: The trouble in housing has much less to do with the wider economy than it does with industry-specific factors like demographics, planning restrictions, and saturation. We do not expect housing to be necessarily representative of the direction of the US economy.

(New York)

There has been a lot of speculation about rising rates and whether the Fed might increase the pace of its hikes. However, until yesterday, that fear had not really exhibited itself in yields. Now everything is changed. Accordingly, Barron’s has run a piece highlighting two funds to help protect your portfolio from rising rates. One is the Loomis Sayles Bond fund (LSBRX) and the other is the Oakmark Equity & Income Fund (OAKBX). The former takes an all-bond approach to offset rate rises by loading up on shorter maturities. The Oakmark fund usually holds around 60% equities, with a mix of bonds making up the rest.

FINSUM: These are interesting choices. Whether to buy passive or active funds to offset rate hikes right now has to be the advisor’s choice. ETFs and mutual funds can both be good options depending on the approach one wants to take.

(New York)

The big global selloff in sovereign bonds, which included US treasury bonds, has spilled over into the corporate bond sector in a big way. One of the biggest ETFs tracking US corporate bonds fell to 2013 lows today. “The jump in rates is inevitably detrimental to long-duration credit performance, with LQD a classic example”, said an analyst, citing BlackRock’s popular LQD corporate bond ETF. While corporate earnings look healthy, the big issue is that investment grade bonds tend to have higher durations than high yield, which means they suffer more when rates rise.

FINSUM: We wonder how much this jump in yields might start to really affect the giant mass of BBB bonds. This kind of move in yields could prove a tipping point.

(New York)

The biggest dividend sectors, such as utilities and REITs, are getting hammered alongside the selloff in bonds. With treasury yields surging on Wednesday, utilities and REITs fell as much as bond prices. Dividend stocks had been experiencing a month of strong performance, but fears have been rising since the last Fed meeting, when the central bank took on a decidedly more hawkish tone.

FINSUM: We are concerned for dividend stocks right now because we think the big move higher in yields might have reset the market’s thresholds. Is the next stop 3.5% on the 10-year?