Developed market 10yr rates jump as the US 10yr hurdles the 1.9% figure.
The 2% level is in sight as multiple signs point north for yields.
Commodities remain on fire – both energy and agricultural types.
Real yields are important to watch. High rates after inflation could mean more bearish price action among high-duration equities.
The US 10yr Treasury rate was in consolidation mode for much of the last year after spiking in early 2021 north of 1.7%. It drifted higher to end December and crept up in January. But the real move came following last week’s US payrolls report. The 10yr instantly catapulted above 1.9% as a huge headline employment gain was coupled with upward revisions to prior months. Traders viewed that key economic data point as the final catalyst to imminent rate hikes, and potentially a 50bps federal funds rate adjustment at the March meeting.
Here Come the Hikes
Wall Street sellside analysts have been aggressively raising their outlook on the number of possible policy rate increases this year. So too have traders. The market now sees the likelihood of more than five quarter-point hikes in 2022. Other markets have had a challenging time grappling with this sudden change – it was just a few months ago when the 10yr was near 1.3% and the Fed was somewhat dovish.
Not a New Trend in Stocks
Stocks have held their lows so far, but high duration equities like non-profitable tech and small-cap growth have been battered in the last year. Friday this week is the one-year anniversary of the peak in some of those ultra-speculative niches. In that sense, the market has been discounting a more aggressive global central bank push for a while.
Commodities Remain Strong
Commodities have not gotten the message. Inflation in that space remains bulled up. Energy and agricultural commodities have continued to trend higher despite fears of a slower economy in the ensuing months and as central banks push forward with rate hikes. Despite a developed market shadow policy rate that has surged 2.4%, commodities are still the leading sub-asset class YTD.
Developed Market Bonds Under Pressure
While the US 10yr holds above 1.9%, global 10yr sovereign interest rate breadth has pushed to extreme levels. Our composite bread indicator in the featured chart below is at one of the highest levels that we have ever seen. (The indicator tracks the z-scores of the proportion of 10yr yields above their 50- and 200-day moving averages and 52wk new highs minus new lows.)
Featured Chart: Higher Intermediate-Term Sovereign Rates – A Global Thrust
Eyeing Real Yields
One indicator we will be watching closely is the trend in real yields. This could be the next fixed-income chart to breakout. A move above the psychologically important 2% level on the nominal 10yr US Treasury rate could spark the next jump.
Watch your Duration
What does it mean for stocks? High-duration assets – like nonprofitable tech and many small and mid-cap US growth stocks – could be under pressure. High current cash flow machines like many energy stocks could feature continued relative strength, but much will depend on how oil moves in the face of hawkish policymakers.
Bottom Line: Bond yields are breaking out. It is not just a US story. We see widespread weakness among global developed market sovereign bonds as our breadth indicator runs to extreme levels. Real yields are particularly moving higher and could be the next indicator to watch for a breakout as the 10yr nominal rate eyes a move above the key 2% level. That would likely mean more weakness for high-duration assets like long bonds and growth/tech.
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