Bond yields always rise as you exit a recession. But the very recent increase in yields appears to be driven by inflation expectations, with US 5-year break-even rates leading the way. Today’s Jobs Report was strong enough to temporarily carry 10-year Treasury yields through 1.60%
Presently trading at ~1.53%, ten-year Treasury yields are testing the highs from last Thursday. Another breakout in bond yields would likely accelerate the recent rerating in high multiple stocks.
The preference for cyclical/value sectors is beginning to look more like a potentially painful rotation out of growth. High multiple stocks are now rerating lower.
Yesterday’s rally in US equities was attributed to a stabilization in bond yields largely due to rhetorical intervention from the ECB, BOJ and RBA. The RBA also took action by stepping up bond purchases.
Markets are definitely more calm following Friday’s reversal in bond yields. Obviously, a more gradual yield backup is preferred from a broad equity perspective. And a calmer yield environment should keep high multiple stocks from a more painful rerating.
The recent pullback in the S&P 500 looks very similar to the one from late January, which ended up being a buying opportunity. Both pullbacks were preceded by decelerating price trend momentum and both looked like a pause in an ongoing bull market.
The 5-year/30-year yield spread is currently priced to 161.3bps and approaching resistance at ~162bps. We remain intermediate-term bullish on the cyclical/value equity trade, but the slope of the yield curve looks extended at the moment and vulnerable to flatten back to 2015 highs of ~155bps.
Last week’s report on January retail sales came in +5.3% (+6% for the control group) vs. consensus for +1%. This has economists taking Q1 consumption growth to levels around +5%.
At 1.33%, 10-year Treasury yields are currently testing secondary technical resistance in the 1.30-1.35% range. We’re not expecting a breakthrough in the near-term, but wouldn’t be surprised given vaccine headlines and policy rhetoric.
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
