Panic at the Bond Disco

The stock market has hit a brick wall in the 2720-2740 zone as a surge higher in bond yields is putting pressure on interest rate sensitive names.  It also doesn't help that the market has rallied for almost 2 weeks straight and is overbought.  The put call ratios have been dropping steadily, and investors have gotten more comfortable taking equity risk. 

It is stock buybacks vs the Fed.  The Fed usually gets what it wants, even if its more than they expected.  They are looking to cool down asset prices, and what better way to do that then by raising interest rates and reducing their balance sheet at the same time.  it takes time for the higher interest rates and bond rolloff to affect the economy.  It is affecting bonds first, and next come stocks, and then finally the economy.  Each happens with a lag, as the tighter monetary conditions slowly put a burden on the economy which isn't as strong as the pundits make it seem.  The fiscal stimulus is less stimulative than the Bush tax cuts in 2001 and 2003.  Those tax cuts gave a bigger percentage of the cuts to the lower and middle class than the Trump tax cut, which made them more stimulative to the economy.  The 2018 tax cuts will provide a small economic boost, but its not going to net out to anything meaningful,  when you consider the higher interest rate burden for borrowers. 

Usually when the financial media is worried about something, its usually meaningless and irrelevant for stocks.  But this time, the bond rout is much more meaningful than what the pundits think.  It is not about inverting the yield curve, but the absolute level of yields which is a burden for the stock market.  If the  2 year was at 2% and the 10 year was at 1.50%, it would be a much better environment than the one we are in right now, which has the 2 year at 2.58% and the 10 year at 3.10%.  In the first case, you have a negatively sloped yield curve of 50 bps.  The current yield curve (2-10s) spread is positive at 58 bps.  The market would much rather have the inverted yield curve at much lower interest rates. 

The main thing a flattening yield curve signals is that the Fed is tightening, and there is not a large supply of long dated bonds, which is obvious.  In other words, it doesn't provide much new information. 

We had the big bond rout on Tuesday along with stocks, and surprisingly, stocks rebounded yesterday without bonds rallying.  At 10 year yields of 3.10%, a long lasting stock rally will be hard to sustain.  I put on a small daytrading short on SPX this morning, looking to cover either in the afternoon or tomorrow.