Inventory-market warning sign: This is what surging bond yields say about S&P 500 returns in subsequent 6 months
A sharp rise in U.S. Treasury yields this year could have more to come, but the speed and magnitude of the move so far suggests equity market returns could suffer in the coming months, according to a top Wall Street technical analyst.
“We have found that current yield as a percentile of its recent range, together with the pace or rate of change it has demonstrated over the recent path, has a large impact on expected returns” for the S&P 500 SPX, -0.97 %,
wrote Jeff deGraaf, founder of Renaissance Macro Research, in a note on Wednesday (see chart below).
Macro Research of the Renaissance
“The lower the level of interest rates and the faster the collapse of those interest rates, the better for inventories [six months] Forward. The higher the level and the faster the price rises, the worse the returns for the SPX, which is ending $6m,” deGraaf wrote.
With 10-year yield clearing resistance at 1.77%, the pace of the rise has propelled RenMac’s yield impact model into its highest historical decile, “and one that historically has put future stock returns under pressure,” he said, as shown below third of the table.
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Benchmark 10-year Treasury bond TMUBMUSD10Y yield, 1.849%, fell slightly to near 1.831% on Wednesday after trading at Tuesday’s highest since Jan. 8, 2020. The 10-year yield rose nearly 34 basis points, or 0.34 percentage point, month-to-date through Tuesday, the biggest jump in the first 11 trading days of a new year since 1982, according to Dow Jones Market Data.
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The sell-off in Treasuries, pushing debt prices down and yields up, has been attributed to expectations that the Federal Reserve will raise interest rates much more aggressively than previously expected and take other monetary policy tightening moves as they head to the persistently high level inflation responds.
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After Tuesday’s sell-off, the tech-heavy Nasdaq Composite COMP is down more than 7% at -1.15% year-to-date, while the S&P 500 is down 4% over the same period and the Dow Jones Industrial Average DJIA is down -0.96%. fell by 2.7%. Shares gave up early gains to trade mostly lower on Wednesday afternoon.
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The sharp increase in yields is accused of unsettling the stock markets and triggering selling pressure, particularly in technology and other growth stocks. Growth stock valuations are based on long-term cash flow expectations. As government bond yields rise, the value of that future cash is discounted.
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It’s not necessarily all doom and gloom, however. Analysts at eToro found that stocks tend to show positive returns 12 months after big jumps in returns: