Nomura: 1.3% Yields Are Fine But If They Hit 1.5%, Stocks Will Be Hammered

How high will rates rise?

That's the question on every trader's lips these days, and although rates got a slight reprieve this morning after oil slumped on a WSJ report that Saudi Arabia is set to boost output by 1MMb/d, the 10 Year yield's upward climb has yet to stop after topping 1.3% yesterday in a way that suggests that dip-buying by traditional longer-term investors has become less of a force.

So what happens if yields keep rising, and what is the critical value that would set off an equity selloff?

According to Nomura's Masanari Takada, if the selloff accelerates from here and CTAs move to the short side in UST futures, the move would be become "essentially unstoppable, pushing the 10yr yield to above 1.5% and forcing US equities (the S&P 500) to adjust downward by 8% or more."

Here are the highlights from his note published overnight:

The potential for CTAs to go further short UST futures, what it would take to put the 10yr yield above 1.5%, and when US equities might balk

  • Global macro hedge funds and CTAs seem likely to ease up on their selling of USTs at a 10yr yield in the 1.3%-1.4% range.
  • However, if it becomes the market consensus that the global economy is on its way to looking like it did prior to the US-China trade war, the 10yr UST yield could potentially keep climbing past 1.5%.
  • We would expect only a mild downward adjustment in US equities if the 10yr yield stays between 1.3% and 1.4%, but in a risk scenario in which the yield tops 1.5%, US equities could correct downward more sharply

Some more details, on these points starting with the key question: will the 10yr UST yield settle in the 1.3%-1.4% range, or keep climbing into the 1.5%-1.6% range?

According to Takada, going by the approaches taken by major classes of speculators and an analysis of historical patterns in cross-asset markets, the main scenario he envisions is one in which “selling fatigue” sets in with the 10yr yield in the 1.3%-1.4% range, and risk asset markets see no more than a mild impact. However, he cautions that he can "also envision a risk scenario in which CTAs’ move to the short side in UST futures (TY) becomes essentially unstoppable, pushing the 10yr yield to above 1.5% and forcing US equities (the S&P 500) to adjust downward by 8% or more."

1 2 3 4
View single page >> |

Disclaimer: Copyright ©2009-2020 Media, LTD; All Rights Reserved. Zero Hedge is intended for Mature Audiences. Familiarize yourself with our legal and use policies every time ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.