Largest Negative Term Premium Since At Least 2007

On Thursday, the 10 year bond yield had a very large spike. It went up 14.4 basis points to 1.525% which is close to where it was before the pandemic. As you can see from the chart below, there was an intraday spike which is a big deal given how well followed/traded this asset is. Ignoring this gap up, no one should be surprised by the increase in the past few weeks. Now that it’s clear the pandemic is near its close, why shouldn’t the 10 year yield get back to where it was prior to the crisis? In fact, growth and inflation should be above normal because of all the fiscal and monetary stimulus in the past year. The 10 year yield can easily go to 2% later this year.

Some speculative stocks have been falling in concert with the 10 year bond. We’ve mentioned in the past that valuations got so high even getting to a 2% yield could spook traders. This factor/sector rotation has been caused by investors betting on the reopening stocks, while selling the stocks that did well during the shutdowns. Most companies probably haven’t seen this large of a shift in their intrinsic values, but we have come to expect overreactions especially in the past year.

Thursday was different from the past few days. Earlier in the week, only the speculative stocks fell. On Thursday, most stocks fell. Even the stocks that are supposed to do well with higher rates declined (banks). As you can see from the chart below, the rolling 24 hour equity correlation with treasury futures went positive which is different from the past few months. The sharpness of the selloff in bonds may have scared some investors.

1 2 3 4
View single page >> |

Disclaimer: The content on this site 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 ...

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.