"It's not going to be a two-day phenomenon", he added.
"To some extent, this will put an end to that", said Jim Caron, Morgan Stanley Investment Management fixed income portfolio manager.
Volatility's grip on global markets tightened Thursday as surging Treasury yields renewed concern that higher rates will drag on the economy and pushed USA stocks lower for the fourth time in five days.
"Over the last half a dozen of years we have been saying equity valuations can be higher because we are living in a low interest rate and low inflation environment but that's reversing a little bit and that's what we are staring at now", said Art Hogan, chief market strategist at B. Riley FBR in NY. "The larger auctions in the coming quarters will tell the story", said David Ader, chief market strategist for Informa Intelligence, in a note. We haven't had inflation, and now we have it and everyone freaks out. And swings in bond prices are likely to become more common than in recent years, when returns were unusually smooth, experts say.
On Friday, New York's Dow closed down 666 points, with the S&P and Nasdaq also down sharply.
At the same time, higher interest rates can make investment alternatives to stocks, such as bonds, more attractive. Friday's trading saw an 849-point trading range for the Dow. That compares with 22.6 times profits for the S&P 500. That only happened eight times all of past year, the fewest since 1964, according to LPL.
The next big test for the bond and stock markets could be on Valentine's Day, when the government releases its next monthly update on inflation. But it certainly prompts central banks to take monetary action, which reduces liquidity in the system. But such calm is unusual, and stocks overheated.
Wall Street has enjoyed a record-breaking run ever since Trump's 2016 election on hopes of a beneficial impact from the USA president's pro-business tax-cutting policies. "There was euphoria because there hadn't been a pullback", said Jeffrey Schulze, investment strategist at ClearBridge Investments. The German 10-year yield, Europe's benchmark, climbed to its highest level since late 2015.
"You are beginning to see the edge taken off the USA economy as capacity has disappeared", Warner said. But it also had a negative impact on the bond market and resulted in forecasts of more Treasury supply and higher $1 trillion deficits.
"The primary culprit was higher-than-expected wage growth in the January jobs report, which may have increased fears that the Federal Reserve would be more aggressive with interest rate hikes in 2018", according to LPL.
Dudley, who called the market slump "small potatoes", said the "jury is still out" on the number of rate hikes.
The Bank of Russian Federation is set to hold a rates decision Friday, with most economists forecasting a cut. The U.S. Senate reached a bipartisan deal Wednesday that would boost spending limits by $300 billion over the next two years.
Wall Street anticipates that more government spending will force the Treasury Department to borrow more money by selling additional bonds.
So investors should be anxious about higher interest rates, just not yet.
"With expectations running high, we think the sell-off may have further to run and we reduced our exposure to equities in our multi-asset funds on 29 January, although we still remain overweight stocks", Greetham added. The leak of a Federal Bureau of Investigation memo on Trump's Russian Federation "dossier" complied by a British ex-MI6 intelligence officer has also unnerved stock market bulls about rising political risk in Washington.
Patterson explains the relevance of America's long-standing strong dollar policy to the Fed's ability to support the economy - and the risks of its abandonment by the Trump administration.
Equity investors are anxious the likelihood of a stronger USA economy and higher inflation could lead the Federal Reserve to boost interest rates more times than previously anticipated.
"The U.S. economy is on solid foundation", said ClearBridge's Schulze.
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