The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Yields up stocks down
S&P futures traded around +10 in the premarket and the index opened about the same. It began leaking value right away and the index went negative for good before 10 AM. Interestingly, this coincided with weakness in Bitcoin. However the narrative for today’s selloff in stocks was about yields. Treasury yields climbed across the curve again. While the market prices a 25 bip cut on Wednesday with 99% certainty, the chatter is that the Fed will deliver some hawkish rhetoric. The curve is pricing that in, in advance.
Yields have been climbing since late October. While a Fed cut has been more confidently anticipated in the same period, the Treasury market has started to wonder if dovish Fed policy will be counterproductive in quarters and years to come.
President Trump will announce a new Fed Chairman soon and Powell’s term officially ends May 15, 2026. It is assumed that Trump will appoint a dove. While dovish policy moves have tended to help stocks, and lower Fed Funds have tended to drop yields across the curve, the market is seeing a potential problem. If the Fed eases, as the President desires, without having collapsed inflation sufficiently, it will return. Treasury yields are controlled by the free market, not the Fed.
So if the market isn’t convinced that inflation is going down *and staying down,* they are going to react with their capital. Higher rates along the curve is that reaction, especially on the back end.
For the last few weeks, the bond market is trying to come to grips with whether dovish policy, and a new head of the Fed, will benefit bondholders or not.
The verdict is not in and the debate is ongoing. You can see it in the yields. The Fed statement and the press conference will go a long way towards influencing that debate. In addition, the coming inflation data will be crucial.
If the bond market sees inflation dropping, they can talk themselves into lowering Treasury yields as the Fed drops the Fed Funds rate. But the converse is also true.
Stocks will love the first scenario but not the second.
We’ve got a new issue on the front burner for the stock market. It’s the rates on the back end of the Treasury curve.
See you tomorrow.
-Mike
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