January 5, 2021
At some point higher bond yields become a problem for equity multiples. In a world without QE, bond yields reflect market expectations for future inflation. The Fed can mostly anchor short-term (2-year) yields through interest rate policy, but market participants determine yields further out the curve. Yesterday’s increase in 10-year breakeven yields (difference between the 10-year Treasury yield and 10-year TIPS yield) above 2% (now 2.02%) attracted some attention, but breakeven yields aren’t the focus for equity markets and multiples. Overnight comments from the Fed’s Bostic and Evans also attract attention for stirring memories of the 2013 ‘taper tantrum,’ but the ultimate trigger for these types of events tend to be technical breakout levels for nominal 10-year yields. While we don’t see the near-term potential for a 2013-style taper tantrum, we do expect equity multiples (SPX now trading at ~21.8x ‘consensus’ 2021 EPS of ~$170) to gently contract if/when 10-year yields trade above 1.075%.