Treasury Yield Hits 2007 High as Fed Decision Looms; Cramer Backs Intel, Micron

On CNBC's Investing Club with Jim Cramer Morning Meeting, Jim Cramer said the market was being driven by the historic surge in bond yields and a rally in oil, not by speculation over the Fed's path. He warned against trying to predict monetary moves too far ahead. "The idea that we can predict two and three rates ahead is really a parlor game. I don't like it," Cramer said. "Everybody plays it, and it is not good for our audience because if oil goes down big, you'll regret that you ever said that you thought there's going to be a rate hike." Club portfolio director Jeff Marks agreed, pointing to earlier predictions this year that Fed Chairman Kevin Warsh would cut rates upon taking over. Those predictions proved wrong, and after two meetings under Warsh, the Fed has left rates unchanged.

Cramer also said people are concerned about what may ensue between Warsh and President Donald Trump if the Fed raises rates on Wednesday. Trump has regularly called for lower rates. According to the CME FedWatch tool, chances of a rate hike are above 92%. Market watchers expect the Fed to boost the target federal funds rate by one-quarter of a percentage point amid rising oil prices and the ongoing war with Iran, CNBC reported. The move could increase borrowing costs for already strapped consumers. Respondents to the CNBC Fed Survey expect at least two rate hikes from the central bank this year.

For bond investors, the rise in yields has changed the risk-reward calculation. Many had focused on short- or ultra-short-term bonds to sidestep volatility that pummeled prices as rates rose on concerns about inflation and the federal deficit. But with yields higher, medium-term bonds in the five-to-10-year range are becoming more favorable, and rates are expected to remain elevated for an extended time. "As yields have gotten higher, there's much more cushion than there was in 2020," said Alec Lucas, director of fixed income for manager research at Morningstar. At 5%, a $1 million investment in the 10-year Treasury would generate $50,000 a year in yield income alone, or $500,000 over a decade. Lucas said investors who want less sensitivity to further rate increases should prioritize short-to-medium term duration portfolios. Carol Schleif, chief market strategist of BMO Wealth Management, wrote that even though the rise in bond yields this year has been orderly, "these elevated yields could be here to stay for some time, especially with geopolitical concerns and elevated energy prices continuing to remain front and center."

Bond prices have an inverse relationship with yields, so as yields rise, prices drop. But in a rising-rate environment, investors have more cushion as prices fall, meaning the prospect for losses is lower than during the Covid-era zero-rate bottom in 2020. Cullen Roche, founder of San Diego-based Discipline Funds, coined the term "escape velocity" to illustrate how and when bonds can deliver positive returns even if rates rise. "If rates rise more than 1% in a year, you'll get whipsawed by price volatility. But you won't get nearly the same losses we saw in 2022 and 2023, because the starting point is so much better," Roche said. His tool identifies the point on the government bond yield curve where the bond yield equals its modified duration. At that point, one year of interest income offsets the price decline from a 1% rise in rates. With rates where they are today, Roche said, "anything five years and lower, you have a cushion. Anything higher, you have less and less of a cushion."

Michael Reynolds, vice president of investment strategy at Philadelphia-based Glenmede, said a buy-and-hold investor holding a bond with a current yield of 4.90% and duration of 5.8 years can tolerate a 0.84% increase in yields before the mark-to-market loss on that bond wipes out one year of interest income. "We're more excited about longer-term duration now because the cost of being wrong ends up being lower as rates rise," Reynolds said. Dave Plecha, global head of fixed income at Austin, Texas-based Dimensional Fund Advisors, said the concepts matter for total return, which accounts for price change and interest. If an investor is earning more interest, there is more of a buffer or price cushion against falling prices, Plecha said. For investors particularly sensitive to price risk, he said, holding shorter duration bonds, such as a three-year duration, can mute the risk of a price drop.

In the stock market, shares of Intel and Micron were modestly higher Tuesday following sharp declines Monday. The declines came after Anthropic CEO Dario Amodei's weekend letter calling for a slowdown in the pace of artificial intelligence development due to safety concerns. "I think Intel's still a buy. I think Micron's still a buy," Cramer said. The club added a few shares of Micron to the portfolio Monday once the semiconductor group stabilized. After speaking with Broadcom CEO Hock Tan on "Mad Money" on Monday evening, Cramer said he is not convinced there will be a slowdown in the pace of AI model development. "I think that really is significant for those who are dumping these stocks," he said. Cramer's charitable trust is long INTC, AVGO and MU, according to the disclosure.

Editor's Summary

The 10-year Treasury yield hit its highest level since 2007, pressuring stocks as the Fed is expected to raise rates Wednesday. Bond investors are finding more cushion in higher yields, while Cramer says Intel and Micron remain buys despite concerns about AI development pace.