As April nears to a close, this has been a solid month for the TSP so far. The C Fund and S Fund both rose by about 3.5%, while the I Fund rose about 3.2%. The G Fund is up a fraction of a percent, while the F Fund declined a fraction of a percent due to rising interest rates.
The 10-Year Treasury Yield Hit 3%
The big news this week is that the 10-year treasury yield climbed over 3% on Tuesday last week, which is a level it hasn’t seen since early 2014, over four years ago:
Back in 2014, the Fed was keeping interest rates at zero, so the 10-year yield dropped back down after it reached that higher level. But now in 2018, the Fed is gradually raising interest rates, so the 10-year yield is likely to keep rising as well, although individual days or weeks may see ups and downs. It did dip back down a hair below 3% at the end of last week, for example.
This 3% level is an important psychological line for current markets. On Tuesday when the yield hit 3%, the Dow Jones Industrial Average reacted by dropping almost 700 points, one of its largest single-day drops on record. The Dow partially recovered during the rest of the week but is still below the level it was on that Tuesday morning.
If the 10-year treasury yield rate continues to inch higher and stays over 3%, the G Fund should give similar returns of 3% or so, which is an improvement over its recent rate of return
However, higher interest rates will increase borrowing costs of corporations (which can mean less capital investment and fewer share buybacks), increase the cost of consumer loans like mortgages (which means less spending power, which can be recessionary), and can make bonds a more competitive alternative to stocks (which can reduce stock valuations).
Bank stocks and insurance stocks on the other hand directly benefit from gradually rising interest rates. They’re more profitable when interest rates are higher, all else being equal.
Wall Street Earnings, C Fund Impact
We’re in the middle of earnings season, where a lot of corporations announce their results for the first quarter of 2018.
Many companies are reporting strong results thanks to corporate tax cuts, share buybacks, and decent economic growth, but the stock market was mildly down anyway this past week.
With stock valuations as high as they are, investors have already been pricing in good earnings expectations.
That being said, some big misses or surprises moved individual stocks. Amazon and Facebook surged this week, thanks to particularly strong quarterly results. Exxon Mobil had a big price decline due to a disappointing quarter. These companies are all in the top 10 largest holdings of the C Fund, but thanks to the inherent diversification of index funds, the ride was smoother for C Fund investors than holders of individual stocks of these companies as their results balanced out with hundreds of other companies.