March 5, 2021
Bond yields: Bond yields always rise as you exit a recession. But the very recent increase in yields appears to be driven by inflation expectations, with US 5-year break-even rates leading the way. Today’s Jobs Report was strong enough to temporarily carry 10-year Treasury yields through 1.60% before settling down on what looks like emerging concern for ECB action at next week’s (3/11) meeting. The Fed may not have reached its pain threshold, but the ECB has been fairly vocal about reining in yields. Markets don’t expect a big policy shift from the ECB, but the existing PEPP framework is flexible enough for the ECB to adjust the pace and duration of purchases, and investors expect one/both to rise.
Rotation: The pace of the yield backup has been impressive with 10-year yields easily breaking through technical resistance at 1.45% last Thursday. In past editions, we explained the potential for equity multiples to rerate lower if 10-year yields get through ~1.45%. Last Thursday, when yields crossed above 1.45%, the preference for cyclical/value stocks instantly transformed into a more painful rerating of high multiple stocks. Many of those high multiple stocks have now reached short-term oversold status, but any reversal will require lower 10-year yields.