Economist's Insights

Today’s Trading Activity – Strong Start to the New Year as Treasury Yields Climb with Stocks

Jan 2, 2018

The Nasdaq started 2018 by extending the impressive run it registered for 2017. After rallying more than 28% last year, the tech-heavy index started the new year by climbing 1.50% and closing above 7,000 for the first time in its history. The S&P closed up a smaller 0.83% and the Dow trailed with an even more modest 0.42% improvement. But the strength was broader than just technology with three S&P sectors rising by more on Tuesday. Energy companies gained 1.8% while consumer discretionary and materials moved up 1.5%. The gains in the energy sector unfolded even with crude prices weaker on the day. Both U.S. and Brent crude eased off of their highest levels in two-and-a-half years; U.S. crude held above $60 per barrel for a second day (chart below). Several S&P sectors fell, however, with the biggest losers being those companies which get buffeted when interest rates rise. Treasury rates rose to recover a portion of last week’s drop. Treasurys were under pressure even before stocks began their daily ascent with European yields snapping higher in response to strong PMIs and hawkish remarks from an ECB official. The 2-year U.S. Treasury yield closed up 3.6 bps at 1.92% with the 5-year yield 4.2 bps higher at 2.25%. Further out, the 10-year yield added 5.6 bps to end at 2.46%. Notably, the inflation expectations component of the nominal yield accounted for roughly half of the daily change and crossed above 2.00% for the first time since March (chart below).