Strong Economic Data Sends Bond Yields Higher

Strong Economic Data Sends Bond Yields Higher

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

This morning the Department of Commerce released data on July's retail sales. Excluding cars, gasoline, and building materials, sales grew at the fastest rate in seven months. Total sales from May through July were up 5.2% from the same period a year ago, while retail and food services sales for July were up 0.2% from June and 5.4% from July 2012. Automobile sales were up 13.3% from the same time last year, while nonstore retailers were up 8.8% from July 2012. These numbers are great, and in most cases they beat analysts' estimates.

So why are the markets falling? The retail sales numbers are a sign that the economy is improving and that in the coming months, American businesses will likely post higher sales and profits for the third quarter. But that all comes with a downside, which is the Federal Reserve. The better the economic data looks, the sooner the Fed will begin winding down its bond-buying program. That, in turn, will send interest rates higher, making the days of cheap money a thing of the past and perhaps slowing the economic recovery.

The fear that "tapering" will soon begin is clear today, as bond yields are on the rise, with the five-year moving from 1.37% yesterday to 1.47% today, the 10 year climbing from 2.6% to 2.71%, and the 30-year rising from 3.67% to 3.76%. And as bond yields move higher today, so do the stock markets. As of 12:55 p.m. EDT the Dow Jones Industrial Average is up 0.32% after spending the morning in the red. The S&P 500 and the Nasdaq have also recovered from morning dips to gain 0.25% and 0.18%, respectively.

A few Dow losers
As we recently saw in Travelers second-quarter earnings report, the company is highly susceptible to rising bond yields. During the quarter the company's book value fell because of its bond portfolio losses, and with rates again moving higher today, investors are selling Travelers stock.

Another company feeling the effects of rising interest rates is Home Depot , down 0.6%. Because the company is strongly tied to the housing market and many believe rising interest rates will slow the rise of housing sales and prices, investors may be backing off the stock, which has had quite the run in 2013. Year to date, shares of Home Depot are up 27%, while the Dow has only risen 17.7%.

Shares of Microsoft are 1.4% after the stock was downgraded by Stifel Nicolaus. The previous rating of "Buy" was cut to a "Hold," and the price target of $36 per share was also lowered. The analyst wrote that despite Microsoft's healthy server and tools division and the Microsoft Business unit, he sees problems stemming from the company's need to spend more money on saving the Windows product. He also said the company is spending more on Windows than it had forecast several months ago and that will likely cut into profits in the future.

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Fool contributor Matt Thalman owns shares of Microsoft. Check back Monday through Friday as Matt explains what caused the Dow's winners and losers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter @mthalman5513. The Motley Fool recommends Home Depot. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published