Stocks are sinking again this morning as yields continue to rise. The 10 Year Treasury Note yield now sits at 1.46%, just 0.04% shy of the much watched 1.50% level. According to quant fund Nomura, a 10Y yield of 1.50% would lead to “runaway shorting” in 10Y Treasury Note futures, driving yields higher and stocks lower.
And over the last few days, yield fears have contributed to several bearish a.m. trading sessions. By the afternoon, however, stocks ended up closing higher than where they opened each time. The Dow roared through the close yesterday, for example, beating both the S&P and Nasdaq Composite.
Will it happen again?
It certainly could, but only if the 10Y yield manages to stay below 1.50%. Yields are simply climbing too high, too fast, for investors to remain comfortable. A slow rise toward 1.50% wouldn’t have raised too many eyebrows.
But the 10Y yield is up 0.50% in only 3 months, measuring a 52% gain. It’s contributing to an already tense situation as stocks linger near their all-time highs.
“Inflationary signals, including a surge in commodity prices, are higher than we have seen in years,” explained Geir Lode, head of global equities at the international business of Federated Hermes.
“The prospect of a sooner-than-expected economic recovery has led to a surge in the U.S. 10-year yield.”
Making matters worse is another round of short squeezes. GameStop (NYSE: GME), Koss (NASDAQ: KOSS), AMC (NYSE: AMC), and Express (NYSE: EXPR) all exploded higher yesterday. Those gains are continuing this morning as short hedge funds stand to get hammered once more, having ironically gone short again on the stocks that just burned them earlier in the month.
“It’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors,” said Charlie Munger, Warren Buffet’s long time business partner and “number two” at Berkshire Hathaway.
If GME soars again, it will be interesting to see whether the major brokers halt trading. The NYSE temporarily froze GME shares yesterday, but no halts were put into effect by the brokers themselves. Following the backlash from investors last time, it’s unlikely that Robinhood will interfere with its users in the event of another GME moonshot – something that seems almost inevitable if hype starts to build again.
“It’s a pretty risky play to try and buy now […] what we might [see] at the open of the cash market is some people trying to get in,” warned Oriano Lizza, premium sales trader at CMC Markets in Singapore.
Michael Hewson, also from CMC Markets, offered perhaps the most rational take on the current state of equities this morning.
“There are two clear stories now” Hewson said.
“You have the concerns about rising yields and they are continuing to move higher today, and then you have got an economic recovery story, which is helping lift the more moderately-valued parts of the market.”
As has been the case over the last few days, the growth-to-value rotation looks to be in full swing. Economic recovery hopes are going to lift the market’s more beleaguered sectors. The overachievers, and tech in particular, should endure a fall from grace in the meantime.
Even in the face of more stimulus, dovish monetary policy, and tumbling Covid totals.
