Morning Notes — Bond Yields and Equity Outlook

Bond yields: Today’s reversal in bond yields follows our technical script with 10-year yields fading near secondary resistance in the 1.65-1.70% range.  Expect a period of consolidation that could take 10-year yields down to ~1.34%.  Upcoming catalysts including tomorrow’s release of February CPI and Thursday’s ECB have the potential to weigh on near-term yields.  But the macro forces pushing yields higher remain in place and bonds are still in a developing bear market.  The most logical technical objective is for 10-year yields to halfway close the gap from 2016, implying a 10-year target of ~1.92%.

Equities: The recent rerating of high-multiple stocks (Tech) followed 10-year yields breaking above our predetermined threshold of ~1.45%.  We don’t see any level above that will act as a second threshold, but the group will act heavy if/when 10-year yields break through ~1.70%.  The new range for bond yields (~1.34%-1.70%) could bring short-term sector leadership changes like the one we’re seeing today, but don’t expect a return to the record high multiples from last summer. Could 10-year yields above ~1.92% jeopardize the equity bull market?  It depends on the reason behind the move.  From January-September 2018, the SPX gained +10% as 10-year yields rose from ~2% to ~3%.  The ~20% correction started in October 2018 after Powell said the Fed would hike interest rates beyond ‘neutral’, just as the US-China trade war was in its early stages and global manufacturing PMIs were declining off an 53.3 April peak.