Stocks have continued their 2-3 week sell-off (since June 11th) with the S&P and Dow down more than -2% and -4% respectively, US Treasury 10-year yields have today fallen below 2.85% (from above 3% earlier in the month) as have 30-year yields from 3.15% to 3% – after a strong auction yesterday demonstrated support at these levels. Meanwhile, Bloomberg splattered their front page with “Hedge Fund Managers See Echo of Past Crashes in Markets” with the likes of Greg Coffey calling, “The ghosts of 2000 are upon us”.
We’re certainly not fans of the traffic-motivated lack of equanimity on the front-pages of news website and papers – which a few weeks ago were calling for imminent 10-year yields in the 3.5%-4% range – but we do believe news sentiment indicators are illuminating and have held a negative outlook since plunging to 18-month lows in April alongside the undeniable trend these past couple of months of more balanced/pessimistic opinion pieces across the press.
With the dividend yield on the S&P 500 at just 1.92% and belief that much of the recent performance in equity is the so called TINA trade (There Is No Alternative to stocks) – equity valuations and flows become increasingly sensitive to changes in sentiment. This is especially the case as prospects for growth temper, earnings forecasts and P/E multiples decline simultaneously, and Treasuries continue to steady within a range; and by the end of this week it looks almost certain that US 10-year Treasuries will have traded almost entirely within the 2.8%-3% range for 5 months.
Also noteworthy is the continued tightening of the 2-10 and 2-30 year Treasury term-spreads. Now at 33bps and 48bps respectively, recently we’ve noticed that the tightening in June (from 43bps and 60bps respectively) has been almost entirely from the longer dated yields falling rather than bear-flattening from the shorter end rising – which it has done steadily from September 2017 to mid-May 2018 where it has met resistance just below yields of 2.6%.
Bond investors can thank ongoing concern over US tariffs and the sharp drop in Atlanta Fed’s GDPNow projections to 1.9% (down from 2.5%) for the quarter and an increasing number of market participants calling 2018 tops for both stocks and Treasury yields. We’ll certainly be looking to how news and market sentiment evolve into and throughout July and the rest of the summer.