More Trouble?

I don’t know if maybe you noticed, but this is playing out exactly like I said it probably would.

In fact, I’m not sure I’ve ever been quite this right in terms of the direction things seem to be headed.

No, stocks haven’t plunged (yet), but what you’re seeing is the reflation narrative dying on the vine while yields reprice sharply higher. That’s not what you want – at all. And it’s exactly what I meant when I warned that should a policy shock trigger a quick selloff in rates, the virtuous negative correlation between stock and bond returns could flip as rising yields are seen not as a risk-on sign, but rather the exact opposite. Collapsing crude and widening HY spreads (two other outcomes I’ve long argued were virtually inevitable) only serve to darken the outlook.

“Treasuries fell, sending five-year yields to their highest levels since 2011, ahead of the Labor Department’s employment report for February on Friday, which has potential to cement expectations for a faster pace of Federal Reserve rate increases,” Bloomberg wrote on Thursday afternoon, adding that “the five-year yield climbed as much as four basis points to 2.133 percent, exceeding last year’s peak by about a basis point [while] ten- and 30-year yields rose more than four basis points, each coming within about three basis points of last year’s highs.” Or, visually:

But here’s the dangerous part: “…the sell-off accelerated at about 1:30 p.m. in New York, concurrently with a drop in U.S. equity benchmarks.”

That’s a positive stock/bond return correlation or, alternatively, a negative rates/stock correlation. Increasingly, bonds and stocks look prone to selling off together. Bad news. And, you’ll recall, something I warned about earlier this week in “Trouble“…