April 6, 2022
Good morning,
Beginning yesterday morning and continuing right through the overnight trading session, bonds have been getting hammered (lower prices, rising yields) and consequently equities are looking a lot less resilient than they have over the past three weeks. The alarming 2’s-to-10’s inverted spread mentioned Monday has worked itself out of inversion but at a seemingly steep cost – the 10yr Treasury yield has scorched higher to 2.65% as of this morning from an already high 2.30%, 48hrs ago. Yikes.
The new challenge for equities is determining the yield level that will be high enough to compete of allocation dollars in global institutional portfolios – that term of art is when will yields bite. It is likely the top question on trading desks around the world this morning. Looking at earnings yields on stocks relative to the valuations of a group of bonds (aggregate) – a relative value version of the famous Fed model. It reads now, with stocks up and bonds down, stocks are no longer cheap versus interest rates, but that interest rates are not high enough yet to “bite”. This may be the most important indicator to watch in the days/weeks ahead.
Be well,
Mike