Aug 5, 2023 - Economy

What markets reporters usually miss

U.S. 10-year Treasury bond yield
Data: FactSet; Chart: Tory Lysik/Axios Visuals

Two noteworthy things happened in the world of Treasury bonds last week: Fitch Ratings downgraded the U.S., and the benchmark 10-year bond yield rose to a level not seen since November.

Why it matters: The Fitch report hit the U.S. on multiple fronts, citing "fiscal deterioration," "erosion of governance," and more.

Between the lines: For markets reporters, the coincidence was irresistible.

  • In the two days following the Fitch downgrade, almost every market report mentioned the downgrade in its headline.
  • Typical headlines included: "Global markets slide after Fitch downgrades US debt" and "US Treasury yields hit 2023 highs after Fitch downgrade."

The big picture: Journalists and traders are human, and humans are storytellers.

  • In order to try to understand something, we tell ourselves a story about it — and when journalists ask traders what's moving the market, they are asking to be told a simple, easy-to-understand story.
  • Such stories are rarely true — that's why journalists are careful to use words like "after" instead of "because." But they scratch the itch of wanting to know why something happened, in a world where the best explanation of short-term market moves is nearly always the deeply unsatisfying one that they follow a random walk.

Be smart: While one day is certainly a period of time that coincides with news-media publishing schedules, it's a terrible period of time in which to gauge market moves.

  • A one-week period, as in the chart above, can begin to show trends — in this case, yields rising ahead of hundreds of billions of dollars in new bond issuance from the U.S. government. Charts spanning months or years can begin to show what happens over an amount of time that a normal individual investor might hold a stock.
  • An intraday chart can show the immediate market reaction to an unexpected piece of news — a merger announcement, say, or a CEO being fired. Often in such cases there's a sharp immediate move, and thereafter the stock trades in a relatively narrow band.

Driving the news: The Fitch report was certainly "a talker," as Axios' Mike Allen might put it. Lots of people wanted to discuss what, if anything, it meant.

  • In terms of market moves, however, the effect of the report was tiny: If you squint, you can just about make out a move from a yield of 4.03% before the report came out at 5pm ET on Tuesday, to a yield of 4.01% afterward. Yes, yields went down — not up — after the downgrade became public.

The bottom line: Sensible investing is a long-term endeavor, and sensible investors generally ignore both one-day moves and ersatz explanations for them.

  • Daily market reports don't tell you why the market moved; they just tell you what stories people are telling. Those stories rarely last long enough to be important or meaningful.
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