Stocks Up, Yields Down: One Story, Two Directions From Seoul
The US session on September 21 looked, on the surface, like a plain good day. The S&P 500 closed at 7,764.7002, up 1.49%. The Nasdaq 100 closed at 30,482.3516, up 2.83% — a large single-day move for an index that size. I read all of this the following morning in Seoul, over coffee, and the first line I went looking for was not an index level. It was the ten-year Treasury yield, which fell 3.5 basis points to 4.96%.
| Close (Sep 21) | Change | |
|---|---|---|
| S&P 500 | 7,764.7002 | +1.49% |
| Nasdaq 100 | 30,482.3516 | +2.83% |
| VIX | 14.87 | +0.41% |
| US 10-year Treasury | 4.96% | -3.5bp |
| US Dollar Index | 100.397 | +0.13% |
| KRW/USD reference rate | 1,383.8 | +0.25% |
Stocks up and long yields up together is the ordinary shape of a growth day: expectations for earnings improve, money leaves the safety of bonds, yields rise. This was the other shape. Stocks rose while the bond market bid yields down, and the VIX at 14.87 barely moved, up 0.41% on a day the Nasdaq 100 gained 2.83%. Nobody was frightened into this and nobody was relieved out of a scare. It was a calm rally priced off the path of rates rather than off the economy underneath them.
From here that reads differently than it would from New York, because I have a second number permanently on the screen. The Bank of Korea’s base rate stands at 3.00%. It is a policy rate, and the US ten-year at 4.96% is a market yield on a long bond, so the difference between the two is not a spread anyone can trade — but it is the plain arithmetic I end up thinking in from here. Meanwhile the won/dollar reference rate closed at 1,383.8, a 0.25% move toward a weaker won. Both the reference rate and the base rate come from the Bank of Korea’s Economic Statistics System (ECOS).
Two Signals That Pull Apart
A single day of 3.5 basis points changes nothing about that arithmetic. What it hints at is the direction the arithmetic is traveling. If yields keep falling because policy is expected to ease, the part of the case for holding dollar assets that rests on getting paid more to hold them gets thinner. The part that rests on equities doing well is, on this evidence, in fine health. So the two halves of a dollar portfolio sent opposite messages on the same afternoon, and the message from the income side is the one that has consequences a year out rather than a week out.
The currency risk does not narrow along with the yield gap, which is the part that never shows up in the US commentary. A won-based holder of US assets carries the exchange rate whether or not there is any compensation for carrying it. And the exchange rate did not behave the way the yield move suggests it should have: lower US yields are supposed to soften the dollar, but the dollar index rose 0.13% and the won went the weaker way. The link between Treasury yields and the won is looser than the textbook says, and I have stopped expecting them to line up on any given day.
The Day They Agreed
The genuinely readable days are usually the ones where the bond market disagreed with stocks. Disagreement gives you something to check: one of the two is wrong, and you can wait to find out which. Yesterday they agreed — stocks up 1.49%, the ten-year yield down 3.5 basis points, the VIX flat at 14.87. What they were agreeing about is my reading and not something either market said out loud, and agreement of that kind is harder to argue with and much easier to be quietly wrong about, because there is no second opinion anywhere on the screen.
I did nothing about any of it. The monthly buying continues on the same schedule it was on last month, because a 2.83% day and a 3.5 basis point day are both noise at the horizon I actually hold things for. What the day does change is a slower question — not whether to hold dollar assets, but what share of them should be the kind that pays a coupon, at a moment when the coupon is being marked down and the currency risk attached to it is not.
There is something worth noticing in how good the day looked and how little of it was about earnings. The Nasdaq 100 up 2.83% while the ten-year yield went down is not, on its own, a picture of an economy doing well. It is a picture of a market moving on the price of money, and I would rather read it that way — as a day about rates — than take the size of the move as good news about anything underneath it.