While the conditions that caused the 2003/2013 yield spikes don’t seem to exist at the moment, it’s also important to recognize the possibility of threats from other sources. The ‘negative convexity’ (durations rise as yields rise) of mortgages keeps this asset class at the top
Sharply higher bond yields has been the identifiable risk for equities since the 11/9 PFE/BNTX vaccine data. Over the last ~20 years, the majority of equity market corrections were preceded by a sudden rise in bond yields.
Our preference to add cyclical/value equity exposure (Industrials, Materials and Financials) was initially based on real yields bottoming back in mid-September. It was an unpopular position in mid-September, but not anymore.
Yesterday, the 5-year/30-year yield spread cleared technical resistance at ~143bps on rising expectations for Democrats to use the budget reconciliation process in order to ‘go big’ on fiscal stimulus.
Better-than-expected US economic data plus an improved vaccination pace argue against additional large-scale fiscal relief at this time but it sounds like it’s going to happen anyway.
Rising expectations for large-scale fiscal stimulus and US vaccination progress are resulting in higher yields and curve steepening. Democrats sound like they’ll use the reconciliation process to pass a ‘fiscal rescue’ package close to $1.7T and the US is vaccinating more people per day than
Q4 earnings season is trending better than expected with ~85% of S&P 500 companies beating consensus earnings vs. an average of ~70% over the last four quarters. Revenues are also better with ~79% ahead of estimates vs. an average of ~61% over the last four
Overnight vaccine headlines may not read universally positive, but bond yields are higher and the curve is steeper post-release. Ten-year Treasury bond prices have successfully completed their 2 week-long counter trend rally with yields bouncing off support at ~0.98% on Wednesday (now 1.077%).
The coordinated short-squeeze in GME and others from Reddit’s blog posts forced a mechanical de-leveraging yesterday, which led to the third largest-ever increase (+61.6%) in the CBOE Volatility Index (VIX).
In the short-run, markets are influenced by fundamentals, sentiment and positioning. In the long-run, markets are only interested in fundamentals and we generally use the other two inputs as contrarian indicators at extremes.
