The Yield Curve Strikes Again

Chart of the US Treasury Curve by

There was no relief from rising yields this week as the strength in the labor market and consumer spending continue to look strong and that means inflationary pressures remain (for now).

The adjacent chart illustrates the sharp move higher in the long end of the curve over the last 90 days. This means the curve is flattening and implies we will eventually see 10Yr yields rise above the Effective Fed Funds Rate. If inflation remains stubborn the Fed will likely keep neutral on rate hikes and let 10Yr yields rise above 6%. That would not be good news for many companies (especially high yield) that need to refinance their debt in the coming 1-2 years. A steep yield curve would indicate a normal rate environment but it will also cause a great deal of pain for bond and stock investors.

Stock Market

Rising bond yields affect stock valuations as analysts value companies by discounting projected future cash flows – meaning higher yields should result in lower valuations (all else equal). Given the accelerated rise in yields, I doubt the stock market has had time to fully digest the valuation repercussions. Until recently, market consensus was that rate increases would be less impactful as rate cuts were expected for 2024. However, the tone of the market on this topic has changed in the last few weeks. It is more likely that much higher rates will be the norm as quantitative tightening and large Federal deficits have cornered bond yields into an upward trajectory.

Chart of the S&P 500 by

This week the technicals above look to be forming the early stages of an acceleration event but it is too early to confirm that but we should know soon. A break of the orange trend-line in the chart around $400 would warn of a larger ongoing correction.

For Perspective

If you want to compare the chart of the S&P 500 above to the chart below of the 10Yr Treasury yield you can see below what an acceleration event to the upside looks like in a chart.

Chart of the 10Yr Treasury Curve by
Paul McCarthy of Kisco Capital, LLC

Thank you for being a subscriber!

Paul J McCarthy III CFA

President, Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.