Will A Higher Ten Year Yield Cause A Decline In Stocks?

The Bank of America fund manager survey asked managers what level the 10-year yield would need to hit to cause a 10% decline in stocks. Of course, a 10% correction isn’t a ‘level of reckoning. That’s a very dramatic description for a correction. As you can see, 43% think a 2% 10-year yield would cause a 10% correction. An additional 20% believe the 10-year yield rising to 2.25% would cause a correction.

Investors are following the Nasdaq’s correlation with the 10-year yield. They believe growth stocks will fall if the 10-year yield hits a certain level. The S&P 500 is near a record high while the 10-year yield is at 1.67%. The overall index has been unaffected, but there has been a big factor rotation under the surface. The 10-year yield is very likely to rise to around 2% based on the coming spike in economic growth and inflation. Plus, expectations for higher long run government spending have moved up. However, markets aren’t straightforward. We don’t know how correlations will look in the next few months. We only know that they aren’t stagnant.

Rate Hikes Expected

In the past few months, expectations for rate hikes have increased dramatically. This is in line with the fed funds futures market. However, we don’t see the Fed hiking rates soon if it stays true to its average inflation targeting. Even if core PCE inflation in 2021 makes up for the past 2 years of low inflation, that would need to be sustained in 2022 for there to be hikes. 2022 will have very tough comps (assuming 2021 inflation is strong). The Fed could get away with not hiking rates this year or next year.

s we have been discussing, this difference between what the Fed has said and what the market is pricing could cause issues this summer. That’s because the Fed still has coverage to be dovish now that the pandemic is still inhibiting economic growth. The labor participation rate is still much lower than it should be. It will lose that coverage in a few months when the pandemic is fully under control.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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