Yields Poised to Move Higher; But Could Generate Headwinds for Stocks
As stocks have moved to the top end of the current range and poised to make all-time highs, yields have increased despite a dovish Fed, but there has been a divergence on the long end of the curve. Even though the 10-year yield seems to be under pressure, the longer 30-year yield continues to move lower reflecting the low inflation expectations seen in the US.
The bond market traded with conviction on Thursday and is steady ahead of the payroll report. Bond prices surged higher and yields across the curve were lower with the 30-year yield leading the charge. The current setup would appear to be very similar to the 2011 period where equities suffered a solid correction ahead of the Euro-zone bond crisis.
In 2011, Eurozone issues came to the fore and were a significant part of the pullback along with the end of a quantitative easing period. Currently, almost all European indexes are at or near all time highs and bond yields in Spain and Italy are near historic lows, which does not suggest a flight to the safety from Europe to the US bond market. Bond buyers are clearly bidding bond prices up in Europe and America, which pushes bond yields down.
The Ten Year Yield is still in a 10-month trading range and recently the range has narrowed substantially. Within the small range, the Ten Year Yield has moved from the middle of the range to the bottom. A break down in the 10 Year Yield would probably have broader implications. It closed on support Thursday, while the S&P 500 closed near resistance.
It is hard to see the equity markets breaking out without strength in the US economy. If yields remain low, bond traders are stating they do not believe in the US economic results which should generate headwinds for stocks.
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