Morning Notes — Risk

Sharply higher bond yields has been the identifiable risk for equities since the 11/9 PFE/BNTX vaccine data.  Over the last ~20 years, the majority of equity market corrections were preceded by a sudden rise in bond yields.  The 2003 (GSE duration extension) and 2013 (taper tantrum) corrections immediately come to mind. Both of these events occurred when mortgage yields increased and consumer refinancing slowed, which extended the duration of mortgage assets beyond levels hedged through futures and swaps markets. At the moment, the conditions for such a move don’t exist.  And identifiable risks are rarely the ones you need to worry about.  The broad market should be able to absorb the stair-step move higher in yields described above, but high multiple stocks may not. A gradual rotation out of defensive groups and potential re-rating of high multiple stocks is the real risk.