The rate jump to start 2022 was the biggest to start a year in decades. Why it isn't hurting stocks

Published Tue, Jan 4 20228:36 AM ESTUpdated Tue, Jan 4 20224:33 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Interest rates are snapping higher in the biggest new year's move in 20 years, but for now stocks can rally on. As tech surged and equities gained broadly Monday, investors kept watch on the big jump in Treasury yields. The benchmark 10-year Treasury yield rose from Friday's 1.51% to as high as 1.642% Monday in the biggest move for the first day of trading since 2001. It continued to rise Tuesday, trading at about 1.65% late Tuesday, after temporarily rising above 1.70%. The Dow rallied to a record close of 36,585 Monday, fueled by big gains in financial stocks, which are more profitable in a rising interest rate environment. Big banks continued higher in early trading Tuesday. For stock investors, the speed of the increase in interest rates is as important as the level, but for now bond strategists do not expect the yield to pierce 2% in the near future. "As long as it stays around 2% to under 2.25%, I don't think it will impact valuations' expansion or contraction all that much," said Jack Ablin, chief investment officer at Cresset. "If it got there a lot faster, I do think if it got to 2.50%, we could see problems." Tech and growth, the groups that are potentially most hurt by rising rates, gained Monday even with the jump in yields. Big cap tech also led the market higher Monday, with Apple's gains giving the stock a $3 trillion market cap for the first time ever. Peter Boockvar, chief investment officer at Bleakley Global Advisors, said tech investors weren't botthered by the jump in rates Monday, but by Tuesday stocks, like NVIDIA , Amazon, and Alphabet sold off as tech and the Nasdaq declined. Boockvar said at some point the rate move could drag on stocks. But for now, financial stocks bounced on the jump in yields. JP Morgan was up 2% Monday; Citigroup rose 4.4%, and Bank of America was up 3.6%. All were higher again on Tuesday. Other financials also gained. American Express was higher Tuesday after rising 2.8%. Visa was rising after rising more than 2% Monday. The last time there was a comparable move in the 10-year yield on the first day of trading was in 2009, but the move Monday was slightly greater, according to Michael Schumacher, director rates strategy at Wells Fargo. "2001 led the way by far, with a 24 [basis point] change on the first trading day," he said in an email. One basis point equals 0.01 of a percentage point. The biggest move for a first week of the year was 36 basis points [or 0.36%] in 2003. The second biggest was last year's gain of 0.23, followed by a near 0.23 drop in 2015, Schumacher noted. Bond strategists had expected yields to begin rising once investors returned to work after the new year's holiday. Yields were depressed for weeks by concerns that the omicron Covid variant would hurt the economy. Bond yields, which move opposite price, moved lower even though the Federal Reserve signaled in December it could raise interest rates three times next year and that it would end its bond buying program by March. The first week of the new year has a lot of potential catalysts for yields. The minutes from the Fed's last meeting are released Wednesday afternoon, and the December employment report is expected on Friday. Bond pros are waiting to see what the minutes show Fed officials discussed about their plans to ultimately shrink the central bank's balance sheet, now nearly $9 trillion. Yields are likely to keep rising for now. "We think the 10s will be around 2% by the middle of the year, but do we get to 1.75% in the middle of the week? It could happen, if the minutes are hawkish," said Schumacher. "That's the key you want to look at rather than the nonfarm payrolls." The 10-year is important because it is the most widely watched of all U.S. yields, as it influences mortgages and other consumer and business loans. But the 2-year most reflects Fed policy, and it was also on the move. The 2-year yield was as high as 0.80% Monday but back at 0.75% Tuesday. "I thought the 10-year yield should be 1.6% at the end of [last] year," said Jim Caron, Morgan Stanley Investment Management head of macro strategies for global fixed income. "I think we're going to make a move toward 2% at some point, probably at the end of the first quarter, beginning of the second quarter Who knows? It could happen sooner." Caron said the 10-year made its peak early in the year last year, and then confounded traders who expected it to surpass 1.60%. Many strategists had expected to see higher yields last year, especially since inflation has been running so hot. "There's a graveyard of traders who shorted these levels last year and never made money on it," Caron said. The difference between this year and last year is that the Fed is winding down its purchases of Treasurys, which had been as high as $80 billion a month. That takes one big buyer out of the market, and rates could rise as a result. The Fed could also start raising interest rates as soon as March, also pressuring bond yields higher. But Caron doesn't expect the 10-year yield to rise that much, and at some point the high inflation pace will slow. "It's going to be hard for the 10-year to stay materially above 2% unless inflation stays higher than people think," he said.

A Wall Street subway station near the New York Stock Exchange (NYSE) in New York, on Monday, Jan. 3, 2022.

Michael Nagle | Bloomberg | Getty Images

Interest rates are snapping higher in the biggest new year's move in 20 years, but for now stocks can rally on.