The bond market can change everything
Yields on 10-year and 30-year U.S. Treasuries rose by the most in three months, as benchmark 10-year yields touched 1.33% early this morning, a one-year high.
Where it stands: There was no clear catalyst for the day's move, market analysts said, just like there has been no real catalyst for the continued bearish momentum that has driven prices down and yields up through the better part of this year.
Why it matters: The Treasury market is the world's most important and often drives price action in other assets.
- It is currently suggesting the market could be entering a new environment.
The big picture: Last year saw the everything rally — equities, bonds, precious metals, emerging markets, commodities, currencies (against the dollar) and cryptocurrencies all boomed — but this year is so far delivering winners and losers.
Winners: Small-cap stocks have popped along with crypto and commodities like corn, cotton and sugar while oil has significantly outperformed.
- Five of the world's top six performing major assets are gasoline, crude oil, natural gas, diesel and the S&P 500 energy index, per a WSJ analysis of FactSet data.
Losers: Long-dated U.S. Treasuries have been the worst-performing asset, and the dollar's resilience so far this year has reversed emerging market bond gains and sunk gold.
- One of last year's top performing assets, orange juice, has delivered a -7.6% return so far in 2021.
Between the lines: Investors are clearly piling into assets that will benefit from a reopened economy and greater movement as well as higher inflation.
Watch this space: "With the 10-year yield slicing through 1.2%, it won’t be long until treasury yields breach the S&P 500’s dividend yield (~1.5%)," equity analysts at Jefferies wrote in a note to clients.
- "This will probably coincide with the first test for the valuations of the higher PE stocks and the relative performance of the S&P 500 versus more loftier valued indices such as the Nasdaq 100."
- "Our three gauges for the direction of US ten year treasury yields are all pointed vertical — particularly the relationship between US money supply and the US yield curve. Jefferies expects the 10-year to reach 2% by year-end."
The bottom line: Rising yields will put the Fed in an interesting position. Mortgage rates already are spiking higher for buyers and could threaten the equity market. If that happens, the Fed will be expected to act — delivering more liquidity and buying more long-dated bonds to bring yields back down to earth.