The Rate Ramp and the Foreign Factor

If you harbored any doubt about the biggest story in the markets right now, then one look at the action in the Treasury bond pits (i.e. interest rates) will disabuse you of that uncertainty.

Recent data on bond outflows show that investors in the United States have been dumping bond mutual funds and exchange-traded funds (ETFs). Outflows so far in August have been pegged at $19.7 billion, which is a big jump in outflows from an already big July metric that showed investors pulled out some $14.8 billion during the month, according to TrimTabs.

The current month’s figure is going to be the fourth-highest month on record for outflows. To put the recent selling into perspective, TrimTabs found that since the beginning of June, some $103.5 billion has exited from bond funds.

The selling in the bond pits has lifted the 10-year Treasury Note yield to 2.84% (midway through Wednesday trade) a level that is just below its two-year high. And while rates are still pretty low when compared to the past couple of decades, the pace of the recent rise in rates indeed has been both aggressive and violent.

Of course, it is not just U.S. investors who are running for the bond exits. Foreign bond holders also are selling. Recent data indicates that foreign bondholders sold some $79 billion of long-term Treasuries in June. China, the biggest holder of U.S. government bonds, dumped $21.5 billion, while Japan, the second-largest holder, liquidated $20.3 billion in Treasury bonds.

Now is there any doubt that the world is responding to the Fed’s “taper” talk with their pocketbooks?

The selling in bonds and the concomitant rise in interest rates is causing equities to come under fire as well. The chart here of the S&P 500 Index shows the broad measure of the domestic market falling below its 50-day moving average for the first time since June.

As we are on the verge of September, the historically worst month of the year for stocks, it behooves us to pay attention to what the market is telling us.

If you’re overweight stocks, then now is the time to consider a little tapering of your own portfolio. If you’re underweight stocks, then be patient and wait for the Fed to make its announcement on what it has in store for quantitative easing.

That decision, as well as the market’s reaction to it, will let us know what our next move is going to be.