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Stocks Cap Losing Week as Bond Yields Jump

02/26/2021 | 06:17pm

By Paul Vigna and Caitlin Ostroff

Rising bond yields blunted U.S. stocks' market momentum this week despite signs of an improving American economy.

On Friday, the Dow Jones Industrial Average fell 469.64 points, or 1.5%, to 30932.37, dropping 1.8% for the week. The S&P 500 fell 18.19 points, or 0.5%, to 3811.15, down 2.45% for the week.

The tech-heavy Nasdaq Composite, which has risen farther than its peers since last March and has been particularly driven by momentum traders, suffered a bigger loss this week. It fell 4.9% on the week, its worst percentage loss since the week ended Oct. 29. On Friday, it rose 72.91 points, or 0.6%, to 13192.35.

Government spending and the Federal Reserve's aggressive monetary policy have supported the stock market during a tumultuous year. But those two sources of stimulus are now fueling inflation bets and sparking a bond selloff. When bond yields were at their lows, they offered investors virtually no returns or even negative returns after inflation. The lack of returns on bonds drove investors to stocks, pushing valuations to their highest point in years. Now that bond yields are rising, those richly valued stocks look less attractive.

"Everything is divorced from the risk in those instruments. Everything is mispriced," said James Athey, senior investment manager at Aberdeen Standard Investments. "Markets are increasingly dominated by momentum."

Yields on Treasurys, considered among the safest assets to own, have been rising in recent days as money managers bet on a rapid economic rebound. The yield on the 10-year Treasury ticked down to 1.459% on Friday, from 1.513% on Thursday, its highest closing level in a year.

For the month of February, the 10-year yield rose 0.369 percentage points. That is the largest one-month increase in the yield since November 2016.

Expectations among some investors that inflation will climb sharply prompted concern that the Fed may increase interest rates sooner than previously anticipated, which could potentially boost borrowing costs and weigh on economic growth.

"What has happened in recent weeks is the markets have had to reprice expectations of the Federal Reserve's rate hikes," said Dwyfor Evans, head of macro strategy for the Asia-Pacific region at State Street Global Markets in Hong Kong.

He said the pickup in bond yields would have a knock-on effect on areas such as corporate lending and mortgage rates. "That is why equities will come under pressure here, because rising yields will have some impact on the real [economy] and earnings might have to slow," Mr. Evans said.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, said the rise in bond yields has left the Fed with only a few options. The central bank can either fight the bond market by ramping up its bond buying, abandon its dovish policies, or do nothing and hope it goes away, he said. All options would have different ramifications for the markets and economy, and that is making life difficult for investors.

This is all coming at a time when the economic picture appears to be improving. The rollout of Covid-19 vaccines, a fresh fiscal stimulus package promised by President Biden and the Fed's pledge to keep its easy-money policies in place have buoyed sentiment for many weeks.

Fresh federal data released Friday showed that U.S. consumer spending increased 2.4% in January after household incomes jumped 10%, mainly on the latest round of stimulus checks. Investors expect Congress to pass another fiscal aid package in the coming weeks.

That money should at some point lead to more spending -- and more economic growth. That, in turn, should bolster corporate earnings.

Among corporate names, Salesforce was down 6.3% to $216.50 after the company delivered earnings guidance that was below expectations, despite a strong fourth-quarter report.

Tech leaders Apple, Amazon, Facebook and Tesla all fell over the five days. For the week, Apple lost 6.6%, Amazon fell 4.8%, Facebook slipped 1.5% and Tesla dropped 14%.

The ICE U.S. Dollar Index, which tracks the greenback against a basket of currencies, rose 0.8%. Investors view the dollar as a safe asset and flock to it when stocks decline.

Write to Paul Vigna at paul.vigna@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com

(END) Dow Jones Newswires

02-26-21 1817ET

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