With 10-year yields trading around 4.50% (with the possibility to go higher) – why haven’t equities sharply corrected? It’s a good question. For e.g., on the surface, one might think equities would struggle given the zero risk premium investors are receiving. But that has not been the case. The stock market has withstood the sharp rise in bond yields (for now anyway). However, I believe there is a simple explanation. It’s the amount of liquidity in the system. Liquidity is abundant – evidenced by the very low credit spreads in the market (participants see very little risk). Generally credit spreads widening are your first sign of trouble.
US 10-Year Yield
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Ready for a ‘Growth Scare’?
We started this year with the market pricing in only “good things”. We had (a) the Fed ready to continue its easing cycle; (b) business friendly administration looking to cut taxes and lower regulation; and (c) the promise ‘limitless’ returns from AI. Investor expectations were very high – evidenced by the valuation multiples they were willing to pay (whether it was P/E; P/FCF; EV/EBIT etc). Traders were all leaning to one side of the boat. However, shares prices have lost all momentum the past 12+ weeks.
Bessent Wants a Lower 10-Yr Yield… But How?
The new US Treasury Secretary – Scott Bessent – is focused on the right goal. He wants a lower US 10-year yield. The former Hedge Fund manager knows how important a lower US 10-year treasury is to the growth of the economy (and the government). His direct language reflects a reality – as most people don’t borrow at the short end (i.e., the rate set by the Fed)