Bond yields are scaling record highs on expectations of a hike in interest rate. A two-year budget deal declared by top senators should strengthen the economy giving the Federal Reserve enough reason to raise rates. A pick-up in wages sparked fears of inflation, bolstering expectations that the Fed could take a more aggressive stance in hiking rates.
Lest we forget, a soft Treasury auction on Feb 7 dragged bond prices down and helped yields move up. This rise in bond yields rattled the equity market, resulting in a lot of gyrations. And why not? When bond yield rises, it increases the opportunity cost of investing in other asset classes such as equities, thus, making them less attractive.
Given such uncertain times, investors should select the safest of stocks, particularly those that are sound enough to withstand the intensifying volatility in the market.
US Stocks Finish Lower, Bond Yields Spike
The stock market is on a roller-coaster this week. Major bourses largely finished in the red on Feb 7 and at current levels, they stand nearly 5% below last month’s record high. The Dow shed 19.42 points to 24,893.35, while the broader S&P 500 slid 13.48 points to 2,681.66. The Cboe Volatility Index (VIX), Wall Street’s so-called fear gauge, in the meantime, remained at 27.73. Any reading above the 20 mark indicates bearish outlook in the equity market. This is in sharp contrast to the fear gauge’s reading in 2017. Last year, VIX fell as low as 9.14.
While stocks struggled for direction, marked by the comeback of once-dormant volatility, treasury yields continued to scale record highs. The 10-year Treasury note yield was up 7.8 basis points to 2.843% following a decline of 2.648% earlier in the week. The two-year Treasury notes rose 4.3 basis points to 2.134%, registering its largest one-day gain since Oct 16. Similarly, the 30-year rate jumped 7.5 basis points to 3.118%, its highest level since March.
What’s Driving Treasurys?
Treasury yields moved north after Congressional leaders struck a two-year bipartisan budget deal, boosting expectations of a stronger economy. This in turn bolstered possibility of an imminent rate hike eventually leading to higher bond yields. In fact, record rise in wage growth sparked fears of inflation and led investors to believe that the Fed will hike rates more times than anticipated.
Bipartisan Budget Deal
U.S. Senate leaders reached a deal to raise federal spending by almost $300 billion to address all kinds of fiscal issues that have been plaguing Washington for years. They have agreed to lift caps on defense funding and some domestic government outlays. Defense budget will be raised by $160 billion, while funding for domestic programs will be hiked by $128 billion.
Congress has time and again voted to raise the budget caps. Earlier, there have been two bipartisan deals to uplift caps by billions of dollars. The first was in 2013, forged between PaulRyan and Patty Murray, while the second was signed in 2015. However, both the deals that have extended through fiscal 2017 have expired.
Wages See Fastest Growth Since 2009
The labor market has come a long way since the Great Recession, with wages growing at the fastest pace in January in more than eight-and-a-half years. Average hourly wages increased 9 cents, or 0.3%, to $26.74. This helped the average year-on-year hourly earnings to rise to 2.9%, the highest since June 2009.
Needless to say, several states have raised wages. Minimum wage has been raised in 18 states in January, which had a positive impact on 4.5 million workers, per the Economic Policy Institute.
Why Spike in Bond Yield Halted a Market Rally?
Major selling point for equities since the financial crisis has been rise in bond yields. Investors always compare yield of equities with that of fixed income. In case of equities, earnings are largely considered the yield of a share of stock. Thus, the current rise in bond yields have made these more alluring, compelling investors to pull money out of stocks.
Moreover, value of future earnings goes down as interest rates go up. Higher interest rate affects almost everything from mortgages to auto loans. Purchasing a house becomes expensive and credit card bite becomes harder. All these in turn could lead to recession, ending the nine-year-old bull market.
Best Screening Parameters Amid Widespread Uncertainty
As the equity market frets over rising yields, make sure you pick safe investments. In general, you should look for companies that are unperturbed by wavering market conditions. The best way to go about doing this is by creating a portfolio of low-beta stocks, which are inherently less volatile than the markets they trade in. In this case, a low beta ranges from 0 to 1.
These stocks also have a good position in the market and pay out part of its earnings to shareholders as dividends. After all, dividend payers boast solid financial structure and are immune to market vagaries. Further, they are positioned to grow in the near term and are economically priced.
5 Top Safe Stocks to Buy
We have, thus, selected five stocks flaunting the aforesaid virtues along with a solid Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
CA, Inc. (CA - Free Report) provides software and solutions that help organizations plan, develop, manage, and secure applications and enterprise environments in the United States and internationally. It has a beta of 0.7. The company has a dividend yield of 3%, while its five-year average dividend yield is 0.5%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.49, lower than the industry average of 19.2. The stock, which is part of the Transportation - Air Freight and Cargo industry, is expected to give a solid return of 16.7% and almost 21% in the current quarter and year, respectively.
Quest Diagnostics Incorporated (DGX - Free Report) provides diagnostic testing information and services in the United States and internationally. It has a beta of 0.67. The company has a dividend yield of 1.8%, while its five-year average dividend yield is 10.5%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.97, lower than the industry average of 18.7. The stock, which is part of the Medical - Outpatient and Home Healthcare industry, is expected to give a steady return of 12% and 17.2% in the current quarter and year, respectively.
Pfizer Inc. (PFE - Free Report) discovers, develops, manufactures, and sells healthcare products worldwide. The company has a beta of 0.94. It has a dividend yield of 3.85%, while its five-year average dividend yield is 7.2%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 12.04, lower than the industry average of 15.8. The stock, which is part of the Large Cap Pharmaceuticals industry, is expected to give a positive return of 10.6% in 2018.
United Parcel Service, Inc. (UPS - Free Report) , a package delivery company, provides transportation, logistics, and financial services in the United States and internationally. It has a beta of 0.91. The company has a dividend yield of 2.9%, while its five-year average dividend yield is 7.3%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.49, lower than the industry average of 19.2. The stock, which is part of the Transportation - Air Freight and Cargo industry, is expected to give a solid return of 16.7% and nearly 21% in the current quarter and year, respectively.
U.S. Bancorp (USB - Free Report) , a financial services holding company, provides a range of financial services in the United States. The company has a beta of 0.87. Jt has a dividend yield of 2.2%, while its five-year average dividend yield is 6.9%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 13.59, slightly lower than the industry average of 13.6. The stock, which is part of the Banks - Major Regional industry, is expected to give a steady return of 14.6% and 17.5% in the current quarter and year, respectively.
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