Hiccup In Stocks Also Bad News for Interest Rates

After a sustained rally over the past three months, the stock market hit a bit of a speed bump in mid-June. Ironically, this is also bad news for investors in interest-bearing accounts such as money market and savings accounts, and even certificates of deposit.

The reason is that the stock rally had been accompanied by a sustained rise in Treasury bond rates. There are a couple of reasons for this. First of all, Treasury bonds are perhaps the most popular safe harbor for investors — when the stock market gets too rocky, as it certainly did in 2008, investment dollars tend to retreat into bonds. This sends bond yields lower. When stocks rally, it tends to draw money away from the bond market.

In addition, the recent stock market rally has been bolstered by optimism about the economy, which in turn has brought on concerns about inflation. Inflation is kryptonite for bonds, so while stocks were rallying, bonds were retreating.

These trends reversed suddenly in mid-June, as bonds rallied while stocks faltered — meaning that interest rates fell. It’s too early to tell whether this is just a hiccup in the stock rally or the start of a new trend, but it could be a setback for interest rates as well as stocks. Treasury bonds represent market interest rates; these do not directly determine rates on things like savings accounts, but they are an indicator of where those rates may be going. That indicator had been pointing upward, but more recently, it has turned downward.