Yesterday’s backup in bond yields resulted in value (SVX) outperforming growth (SGX) by 99bps. Conditions for a systematic reversal in yields started about 7 days ago when the 10-year Treasury price put/call ratio reached extreme overbought levels.
Last week’s apparent hawkish Fed pivot had bond prices reaching further into extreme overbought territory, but yields still held support, loosely defined at ~1.45%.
The Fed’s updated dot plot on Wednesday just moved closer to what markets have been signaling in OIS (overnight swaps) forward rates for months.
Bond yields reflect market expectations of future rates of inflation or growth. Higher future bond yields tend to lead cyclical equity sector (Industrials, Financials, Materials, Energy) outperformance.
This week’s weaker guidance from JPM and C may set the stage for an oversold reversal as Fed stress test results in ‘late June’ should act as a clearing event for large cap banks to accelerate buyback plans.
Ten-year yields are trying to break through their 100-day moving average at 1.50%. The month-long rally in Treasuries (yields lower) was almost entirely driven by technical factors, rather than growth fundamentals.
The next major event on the catalyst calendar is Wednesday’s FOMC meeting. Markets are almost entirely focused on a possible tapering message, but the meeting also includes an updated dot plot (member expectations for future rate hikes).
As previewed, Treasury yields move lower despite this morning’s hotter-than-expected May CPI report.
Consensus is looking for headline CPI to be up +0.4% month-over-month and +4.7% year-over-year. Core CPI is expected to be up +0.5% and +3.5%, respectively.
May CPI is scheduled for release this Thursday. Year-over-year US CPI accelerated to +4.2% in April from +2.6% in March (both above 2.5%).
