The US 10-year Treasury yield spiked to 1.80% recently leading to a host of important intermarket impacts
Global yields have also increased, led by a surge in EM sovereign bond yields
The trend began several weeks ago but accelerated when the new year rang in
The major US stock indices are lower to kick off 2022 as rising interest rates spook investors. The US 10-year Treasury yield jumped to 1.80%, the highest since early 2020. The US Federal Reserve turned more hawkish in last week’s Fed Minutes report. Traders now expect about an 80% chance that Chair Powell hikes rates at the March meeting.
In all, there could be four quarter-point interest rate increases this year. Some economists even predict that the FOMC will raise the Fed Funds Target Rate in each of the next eight meetings. That would bring the key interest rate to 2.25-2.50% by early 2024. Moreover, quantitative tightening could happen in the second half of 2022.
That’s a lot for the market to digest. It was not long ago when the Fed was seen as dovish, but ongoing inflation figures have finally made their impact on Fed policy. We will get a fresh reading on US CPI later this week.
It’s not just a US-centric story. Global 10-year yields are moving higher. Our featured chart displays the US 10-year Treasury rate along with our indicator of 10-Year global sovereign bond yields. Buttressing the move in Treasuries is an increasing number of global notes falling in price and rising in yields.
Featured Chart: US 10-Year Treasury Yield & Global 10-Year Sovereign Bond Breadth Jump
We believe there may be more room for yields to run. With the US breakout, we also notice a sharp move higher in EM rates of the same maturity. EM central banks were forced into a tightening cycle earlier than most developed countries last year – it can be seen as a potential harbinger.
Our macro model has the US benchmark rate climbing above 2.0% in time. Given the technical breakout to two-year highs on that yield and the strong thrust in global breadth, the stars appear to be aligning for a sustained move higher in yields.
Higher rates so far in 2022 have had an impact. The Nasdaq is off to its worst start to a year since 2000 while value equities and foreign markets outperform. It’s barely more than one week, and we have seen bouts of this kind of intermarket behavior before, but the first six trading days of 2022 display a decided move. The narrative didn’t start on January 1, though. US growth stocks started to underperform when the calendar flipped to December last year.
The value vs growth saga continues. While value investors turn giddy about recent price action, the long-term relative chart barely registers an uptick. Readers can interpret that in two ways – 1) it’s just a corrective move in a longer-term trend or 2) there is plenty of room for more value upside. Meanwhile, defensive value is just a smiden off its low.
The Takeaway: Rising rates during the last few weeks have been the focus of traders. Along with an increasing US 10-year yield has come strength in value and ex-US stocks, rising oil prices, and a crypto collapse. We see more upside to yields given the global nature of the bond market selloff.
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