Inside Markets — Pressure on Bond Yields

The 20-year Treasury auction just hit with the final yield 1.2 basis points higher than expected. This is putting some incremental upside pressure on bond yields with the 10-year trading to 4.57%. The 4.5% level is often cited as a key threshold for equity investors, but only because it is a round number. The real level where equities could come under pressure is north of 4.78%, which was reached in early January and matches our ’60 bp in 30 days’ rule of thumb on velocity if achieved by the end of next week. The reconciliation bill making its way through the House expands fiscal spending, which will likely create an upward bias in yields until there is an effort to restrain spending.

The upside gap through 5750-5785 invalidated the tactically bearish trend that developed on 4/3 and put the SPX back into a low-volatility bullish technical regime. The index seems to be in consolidation mode after reaching short-term overbought territory.  A period of consolidation above key support at 5600 would be a bullish development. Notwithstanding a spike in 10-year yields above ~4.80%, we see light positioning, bearish sentiment and positive fund flows keeping a near-term bid on the SPX.  Stronger-than-expected Q1 earnings growth of +13.6% is the fundamental justification for the rally off April lows, but the index will likely need incremental good news (trade related) before moving higher in the near-term.