The first half of September was a striking reversal from the anxious market activity in August. Virtually overnight, Treasuries became an afterthought as investors stampeded back into the stock market amidst positive economic news (triggered initially by the ISM manufacturing report and the August employment report).
The equity rally has driven up each major index (S&P, DJIA, & NASDAQ) between 3% and 6% so far this month, which has (at least temporarily) taken the momentum out of a Treasury market that has been rallying steadily for about six months. For one of the few times since yields peaked in early April, 10-year Treasury prices fell and yields increased for two consecutive weeks (from 2.58% to 2.75%). The ripple effect impacted mortgage rates, which also crept up a bit.
But the increase in yields didn’t pass through to the retail corporate bond market because credit spreads tightened during that same period. This makes sense, since spreads are a proxy for risk. When investors are less fearful spreads tend to decrease.