Equities slump as real rates surge

10-year US yield now above S&P 500 dividend yield

Chart of the Day

The huge news in markets yesterday was the surge in real interest rates, with the 5-year TIPS yield jumping by 25 bp and the 10-year by 20 bp. For the 5-year, that only reversed the fall so far this year, but for the 10-year it took real rates back to the highest since July. As the Market charts that follow show, that sent shockwaves through the equity and FX markets.

Macro

The macro news was generally good, but didn’t help . US initial jobless claims fell to 730,000 last week, but that was probably due to disruption from the severe weather rather than a genuinely large improvement in claims. Continuing claims increased to 4.4mn in the week before.

US durable goods orders rose by 3.4% MoM in January. Excluding transport, orders increased by 1.4% MoM. They are both far above pre-virus levels.

Markets

The surge in real yields push bond yields up, but the big surprise compared to the earlier rises in recent weeks was that the 5-year yield jumped by more than the 10-year or the 30-year. So the curve flattened. That seems to suggest traders don’t believe the Fed’s commitment to keep policy rates low for many years.

The rise means the 10-year bond yield increased to above the dividend yield of the S&P 500. That will make many types of investors, such as pension funds, start looking at bonds again as a source of yield and could detract from equity demand.

The further rise in real yields was particularly bad for tech stocks, with the S&P 500 tech sector now down by 5.9% in the past week.

The ratio of financials to the S&P 500 did well amid the rise in interest rates, which are often thought to be good for lenders’ profits.

But it wasn’t a case of financials actually doing well. Rather, the sell-off hit all sectors, but financials happened to fall by relatively less.

The jump in yields was higher in the US than in many countries and sent the USD soaring against most currencies.

One key exception was the euro, although the further rise in real yields in favor of the US suggests it might not be long until the euro drops back.

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