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Friday, 19 June 2015

Street Talk: Global Bond Plunge Could Trigger 50%+ Stock Slump

Opinion: Get ready for a 4,000-point Dow drop

The stock market has an empirical rule: interest rates lead stocks. And the current interest rate environment is pointing to a massive decline for the U.S. market.

Consider: The Federal Reserve has taken rates to the lowest level in more than a generation. This has energized stock prices. The Fed has persisted in its directive to “stay the course,” having made no raises in the discount rate for more than seven years. Such monetary policy has no precedent; this is the longest stretch of accommodation by the Fed in the post-World War II era.

But there’s Fed-induced rates, and “actual” rates. The most widely followed Treasury markets are the longer-term 10-year TMUBMUSD10Y, -1.54%  and 30-year TMUBMUSD30Y, -1.00%  markets. These two markets are highly sensitive to longer-term actual interest-rate pressures. For example, banks use longer-term Treasurys to make decisions on pegging personal loan rates to clients for mortgages, businesses, and other uses. The commercial and industrial areas of the economy also are susceptible to the actual cost of money.

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