Inside Markets — Ten-Year Yield Level

Pressure on equity markets from rising bond yields continues, but is unlikely to generate significant downside unless/until 10-year yields break above ~4.75%. Recent disinflationary anecdotes from airlines, consumer staples, quick service restaurants (QSR) and auto dealerships also imply a loss of pricing power, margin pressures and lower earnings estimates. The apparent loss of pricing power has already translated into a notable loss of enterprise value (EV) for most companies in these industries.

Ten-year yields closed well above near-term resistance at 4.475% yesterday and currently above next level resistance at 4.58%. A close above 4.58% sets markets up for a retest of the 4.73% level that marked the start of the bullish equity trend from early November. Two-year Treasury yields have also broken through key resistance with a retest of 5.08% now likely.

Equity markets can tolerate higher yields if the backup occurs over a long time period. Short/sudden yield backups result in higher realized volatility and multiple compression. The current backup has been fast but relatively orderly with volatility remaining at subdued levels. The CBOE Volatility Index (VIX) has picked up from 11.86 last week to 14 today, but far short of our problematic threshold of 20. Still, the recent backup in yields has resulted in some downside for equity markets with small cap stocks hardest hit. The SPX is now nearing first level technical support in the 5220-5260 range as it burns off overbought conditions. A successful test of this range, oversold conditions after a period of consolidation and a reversal in 10-year yields from ~4.73% would be an opportunity to add exposure to a price objective of 5415. However, a tactical break below 5220 with 10-year yields >4.75% would likely take the index through a CTA sales trigger at 5170. A break below that level would result in increased selling pressure and ~100 point air pocket to 5060. Late cycle rally exhaustion after ~19 months of curve inversion could then drive an emerging recession narrative that would only need a few growth disappointments to gain momentum. Cross market signals only seem to matter for equities when they break a prevailing pattern. Ten-year bond yields are the cross market to watch at the moment and would start to matter on a break above ~4.75%.