US stocks surge as bond markets take a breather

The Dow rallied nearly 700 points in early afternoon trading Monday, as US Treasury yields pulled back and took a breather from their recent ascent.

All three major stock indexes opened sharply higher and continued their rally as the trading session went on. The Dow was up 2.3%, or nearly 700 points, in the early afternoon, putting it on track for its best day since November.

The broader S&P 500 climbed 2.6%, while the Nasdaq Composite was up 2.8%.

If the market closed now, the S&P would have had the best session since June. And the Nasdaq is also looking at its best day since November.

The recent jump in US government bond yields weighed on the stock market last week. Investors concerned that inflation could spike as the economy reopens fully, forcing the Federal Reserve to raise interest rates sooner than expected, pushed bond yields higher.

Higher interest rates would make it more expensive for companies to borrow, and are thus bad for stocks. This dynamic played out all of last week even though Fed Chairman Jerome Powell reiterated that the central bank wasn’t concerned about a prolonged jump in inflation.

The 10-year US Treasury bond yielded 1.45% in the early afternoon, down 0.01%. Bond yields and prices move opposite to one another.

“While still very low from a historical perspective, yields have marched steadily higher over the last two months due to the prospects of an economic boom,” wrote Angelo Kourkafas, investment strategist at Edward Jones.

Of course a booming economy is a good thing — both for investors and non-invested people. Considering the devastating effects of the pandemic, the Fed won’t stand in the way of the recovery by raising interest rates too early.

“The bottom line: The spike in long-term bond yields could prove to be a catalyst for stocks to take a breather, but it is not a structural threat to the broader recovery,” said Kourkafas.

Better-than-expected economic data is also helping with the good mood on Monday.

America’s manufacturing sector fared better than predicted in February, according to data from the Institute for Supply Management. The industry’s purchasing managers’ index, measuring activity, came in at 60.8. Any number above 50 denotes an expansion for the sector.

Construction spending data for January was also better than predicted, up 1.7%.