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Barclays Predicts Rates to Continue Rising Until a Significant Stock Market Decline Occurs

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Barclays Predicts Bond Market Decline to Continue Until Stock Sell-Off

According to Barclays, the steep decline in the bond market and the subsequent rise in interest rates will persist until there is a significant sell-off in stocks. Strategist Ajay Rajadhyaksha highlighted that the increase in market interest rates, which move inversely to bond prices, will not subside until investors substantially reduce their exposure to stocks. Rajadhyaksha expressed skepticism about a quick resolution, stating that data are unlikely to weaken enough to support bonds, implying that risk assets must continue to decline for longer rates to stabilize. The 10-year Treasury yield recently reached its highest level in 16 years, surpassing 4.8%, while the 30-year Treasury yield exceeded 4.9%, up from less than 4% just a few months ago. Rajadhyaksha emphasized that there is no specific threshold for yields that would automatically attract enough buyers to initiate a sustained bond rally. Although equities have already faced pressure, with the S&P 500 down approximately 5% in the past month, the broad market index remains positive for the year. However, if stocks continue to decline, bonds may benefit from the portfolio effect as investors shift towards safer assets like Treasuries. Barclays believes that for bonds to stabilize, there needs to be a further repricing of risk assets. Without this, there will be no sustained bond stabilization, and given the response of risk assets to bonds, there will also be no stabilization in risk assets. Rajadhyaksha suggests that stocks have significant room for further repricing before bonds can stabilize. Another potential scenario for bond stabilization is if investors perceive an imminent recession, which could subsequently impact stocks. Additionally, a decline in U.S. data, particularly if it worsens sharply and quickly, could also contribute to bond stabilization. While traders often look to the Federal Reserve to calm the bond market during times of stress, Rajadhyaksha notes that the central bank is currently reducing its balance sheet by selling bonds. Given the persistent inflation above the Fed's 2% target, it is unlikely that the central bank will reverse course. Rajadhyaksha states that the only way the Fed could assist longer yields is by aggressively hiking rates to convince markets of an impending recession, prompting a rush to buy longer rates. However, this scenario is deemed highly unlikely, and it is expected that the Fed will maintain its current course.

Implications for New Business Formations

The recent predictions from Barclays regarding the bond market decline and subsequent rise in interest rates present significant implications for new businesses, particularly those in the financial sector. As Ajay Rajadhyaksha suggests, the stabilization of bonds is dependent on a significant sell-off in stocks, indicating a potential period of market volatility.

Market Volatility and Business Strategy

For startups and new businesses, understanding and navigating market volatility is crucial. If stocks continue to decline, as Rajadhyaksha suggests, businesses may need to adjust their strategies, particularly those heavily invested in equities. The shift towards safer assets like Treasuries could also influence investment strategies.
Perception of Recession and Business Confidence
The potential for bond stabilization if investors perceive an imminent recession could impact business confidence and investment. New businesses, particularly those seeking investment, may face challenges if investor confidence is low due to fears of a recession.

Role of the Federal Reserve

The Federal Reserve's current course of reducing its balance sheet by selling bonds, as noted by Rajadhyaksha, could also impact new businesses. The central bank's actions and the potential for aggressive rate hikes could influence borrowing costs and overall economic conditions, affecting business operations and growth prospects. As new businesses navigate the complexities of the financial market, understanding these dynamics is crucial. The predictions from Barclays offer valuable insights into potential market trends and their implications for business strategy, investment, and growth.
Story First Published at: https://www.cnbc.com/2023/10/05/rates-will-move-higher-until-a-deeper-stock-sell-off-barclays-says.html
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