- Interest rates on long-term government bonds are rising, according to DataTrek, reflecting investor risk-off moves.
- The change in long-term government bonds from their mid-January lows suggests a selloff for equities.
- “As long as real yields stay at current levels or rise further, stocks may not be able to sustain a sustained rally.”
Long-term Treasury rally suggests that the last seven weeks of stock rally may not be sustainable, according to DataTrek Research.
DataTrek co-founder Nicholas Colas highlighted in a note on Thursday that the 5-year Treasury yield has jumped from 3.99% year-to-date to 4.17% now.
That reflects a difference of 0.18 percentage points, roughly reflecting a 0.19 percentage point rise in inflation expectations priced into five-year Treasuries, Corus said.
However, those yields are up 0.74 percentage points since hitting a 2023 low of 3.43% on 18 January. Meanwhile, inflation expectations rose slightly by 0.43 percentage points from 2.09% to 2.52%.
The same breakdown is reflected in 10-year government bonds.
According to DataTrek, the year-to-date change can be attributed to rising inflation expectations, but there are other factors behind the rise in yields.
“This shows that real interest rates have risen in the last month, indicating that investors are demanding higher inflation-adjusted risk-free rates of return,” Corus wrote. . “In other words, the recent spike in yields is not just inflation. Rather, it is a sign that investors are becoming more risk averse.”
In a recent working paper, Cleveland Fed economists suggested the central bank could not cut inflation to its 2% target without triggering a dramatic surge in unemployment and a deep recession. However, relaxing that target is unlikely to have much of an impact on market expectations, the authors note.
Kolas added that the S&P 500 peaked this year on February 2, shortly after yields bottomed out. If investors move to safer investment options in the market (as yields seem to suggest), the strength of equities could weaken.
“As long as real yields stay at current levels or rise further, stocks may not be able to maintain a sustainable rally,” Mr. Corus said.