The inflation bogeyman has reared its ugly head and sent US stock investors racing for the hills in recent days. In the past 21 episodes since 1945 when the 30-year US bond yield has suffered "significant" spikes, stock prices have only declined in three of those periods. The accommodation phase is ending, he says, but we're not yet in a tightening phase where rates rise so high that equity investors panic-but we may not see the same kinds of gains we've seen in years past.
Volatility remained high compared to recent months.
Fears of inflation linked to a falling dollar are driving up bond yields and fueling expectations of potentially four interest rate hikes from the Fed this year.
"The bond market has definitely got the stock market's attention", said Ryan Detrick, senior market strategist at LPL Financial. "The Federal Reserve made the mistake of creating a huge bubble economy that completely depends on extremely low interest rates to survive". While some experts have said that a 3% 10-year Treasury yield will cause investors to move from stocks to bonds, Tom Goggins, co-manager of the Silver-rated JHancock Income, says that, based on what the stock market has done over the last few days, it's possible that the magic number may have already been hit. The market's main gauge of volatility, the Cboe Volatility Index, rose 5.73 to 33.46 on Thursday, about three times the average level of the past year.
Investors in U.S. stocks are getting uneasy over the continuous upward push in bond yields.
This time around, the moves were set off by concerns of rising inflation in the United States.
On Thursday, New York Federal Reserve President William Dudley said the central bank's forecast of three rate hikes still seemed a "very reasonable projection" but added there was a potential for more, should the economy look stronger.
Trump campaigned on a pledge to "Make America Great Again" by cutting taxes and regulation, re-working free-trade deals with other countries and spending $1 trillion on infrastructure like roads and bridges. Michele thinks rates are "absurdly low" given the strong economic recovery we've seen, but until quantitative easing disappears entirely, he doesn't think the 10-year Treasury yield can rise much above 3.25%. He said recently when Treasury yields were in the low 2 percent range, price-to-earnings multiples were able to get to about 18 percent.
Thirty-year bond yields rose to their highest levels in nearly a year before the government is due to sell $16 billion in 30-year bonds on Thursday, the final sale of $66 billion in coupon-bearing supply this week. The was at 2.81 percent from a high of 2.88 percent earlier in the day and the rising yields had started the stock market spiral lower.
Meanwhile, Trevor Greetham, head of multi-asset at Royal London Asset Management, predicted the sell-off in equity markets will run further and has cut exposure in his funds accordingly.
U.S. Treasury prices gained after renewed weakness in equity markets increased demand for the low risk debt, while oil prices sold off more than 3 percent.
The fragile investor psyche is likely to lead to continued volatility coming off a week that saw the Dow suffer its largest intraday index point decline in history on Monday, almost 1,600 points.
Some stock strategists say the stock market may have found a near term bottom Wednesday but the volatility is expected to continue.
"Investors need to think carefully about their bond exposure", he said.
The next big test for the bond and stock markets could be on Valentine's Day, when the government releases its next monthly update on inflation.
The average yield on the 10-year Treasury note over the past 30 years is 4.834 percent, still well above current levels.
While those past performance stats might not make investors feel any better as the Dow swings wildly on a daily basis, the data show stocks can go up at the same time rates are moving higher.