Home Opinion These Grim Bond Predictions Stamp Out Optimism About Stock Market Recovery

These Grim Bond Predictions Stamp Out Optimism About Stock Market Recovery

Bradley Gerrard
Last Updated September 23, 2020 2:01 PM
  • New research showing Treasury yields are too high could punch a hole in stock market optimism.
  • If 10-year yields have further room to fall, this suggests investors could be too upbeat about America’s escape from the pandemic.
  • Perma-bear Albert Edwards suggests Treasury yields could turn negative, causing stocks to fall.

Bearish predictions about U.S. Treasury yields could be devastating for hopes about the stock market’s recovery.

Short-term economic data have fuelled optimism in stocks, causing investors to think the U.S. is overcoming the pandemic’s economic destruction.

This has supported equities, with the Nasdaq hitting an all-time high of 10,131 on June 23.

At the same time, 10-Year U.S. Treasury yields have drifted up to 0.68% from their 2020 low of 0.499%, meaning prices have fallen.

10-year yield
The yield on 10-Year Treasuries, which moves in the opposite direction to the price, has slowly risen as investors back stocks. | Chart: Yahoo Finance 

But an analysis by Cornerstone Macro suggests even at today’s rate, the 10-Year is roughly 40 basis points too high.

Treasuries research
Research by Cornerstone Macro suggests 10-Year Treasury yields remain overvalued and still have further to fall. That’s potentially bad news for stocks. | Source: Twitter 

And perma-bear Albert Edwards, global strategist at Societe Generale, reckons that U.S. Treasury yields could well head into negative territory .

Bad news for stocks

If bond yields turn negative, investors are effectively paying to invest in the U.S. government rather than riskier assets.

In such a scenario, it’s highly likely equities would take a steep dive.

If a bear market bites, financial pressures could force companies to lay off workers and scrap planned investment.

Under such pressure, companies might struggle to repay debt, pushing investors away from corporate bonds and further into U.S. Treasuries.

Investors Still Ravenous for Treasuries

The demand for U.S. Treasuries remains extremely high even as the Federal Reserve reins in its purchases to $80 billion a month .

The bid-to-cover ratio was 2.460 this week, according to Wells Fargo. Such aggressive demand effectively means each dollar of bond issuance was receiving more than $2.40 in bids .

Sure, this was down from 2.680 in the previous auction, but the Fed’s reduction in buying will have contributed to some of the falls, therefore distorting the picture.

While the Fed remains a major buyer, the latest data show other U.S. entities such as institutional investors, bond funds, pension funds, insurers, hedge funds, and cash-rich corporations plowed into U.S. Treasuries in April.

US Treasury owners
There is still a massive demand for U.S. Treasuries even with the Fed stepping back slightly. | Source: US Treasury Department/WolfStreet.com 

This support means even with Treasury yields at historic lows, there could be further to go thanks to investor desire.

At the same time, investors who are hearing the calls that stocks are overvalued but are choosing to ignore them might want to think again.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com.