What Should You Look For As Bond Yields Climb

Understanding Bond Yield
Bonds, Investing, Personal Finance, Stock Market, Trader Talk
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The stock market starts the week under some pressure as yields from bonds rise with the hopes of a global economic recovery is on the horizon. The hopes have been raised with the continued vaccine rollouts around the world and the $1.9 trillion stimulus package from the Biden Administration. THe yield of the benchmark 10-year Treasury bond rose to 1.377%, a 14.5 basis point amount, during the week as investors continued their flight from bonds with fears of inflation growing. Remember that in bonds yields move opposite to prices of them.

 

The Chairperson of the Federal Reserve, Jerome Powell, is set to testify before Congress on Tuesday and Wednesday and should be watched with heightened scrutiny. The founder of Fundstrat Global Advisors, Thomas Lee, however sees plenty of reasons why stocks should still be considered buys. He said there was apprehension with Powell’s testimony coming up but he is pushing for people to “buy the dip”.

 

Mr. Lee says that, “Part of this [apprehension] reflects the fact that bond yields have been steadily rising and equity investors are nervous that the bond market might reach some sort of “breaking point” during [Powell’s] testimony.” He also said that it was a possibility that stocks would act “nervously” during the testimony timeframe. Mr. Lee added that, “The larger story arc, in our view, is that equities have multiple positive supports and this constructive backdrop likely prevents a larger risk-off spillover.”

 

The first reason he notes is that Washington is pushing forward on the relief package and is supported by the current Treasury Secretary Janet Yellen. Next, the Federal Reserve has been vocal in its policies, and was willing to be patient. Another reason to be positive about equities is that the United States Economy is working its way open and momentum will likely be strong when that happens. In fact JPMorgan noted that a ‘v-shaped’ recovery would outperform China.

 

There is a perception gap between policy makers and incoming coronavirus data. New cases are on track to be below 50,000 this week and this gap may be more positive toward stocks. Millennials with savings are slowly moving assets toward stocks which adds to optimism, as evidenced by the growth of retail brokerage accounts recently. On that Mr. Lee says that, “Bonds are also becoming less attractive total return vehicles as inflationary expectations are increasing, boosting the attractiveness of equities.” The final point he has is volatility, with the VIX volatility index in a period of steady decline, which has historically led to large equity gains.

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