Inside Markets — Bond Yields

The S&P 500 (SPX) posted a second consecutive weekly decline with cyclical sectors underperforming defensive groups by 5.5% last week. This happened despite ongoing resilience in US growth data and a July CPI print that suggested further progress on the disinflation front. Unfortunately, the progress on disinflation fell short of removing Fed policy ambiguity into next week’s Jackson Hole event and September FOMC meeting. But the bigger issue weighing on equities has been the recent repricing in bond yields as the 10-year threatens to break above the cycle peak near 4.20%. Note that a break above ~4.20% would likely generate more near-term downside for the SPX. And closing SPX levels below ~4405 would derail bullish trend dynamics that followed the May-July rally.

Bond yields: The recent repricing in Treasury yields follows last week’s increased auction sizes and lackluster demand possibly linked to the US sovereign credit rating downgrade. End-user demand for last Thursday’s 30-year auction declined to 87.5%, its lowest level since February. While these supply/demand drivers seem daunting, we stay constructive on bond duration given favorable positioning and technical dynamics.