Does This Bond Breakout Mean THE Top is In for Stocks?
Posted May 17, 2021
Last week I outlined how inflation has led to the yield on the 10-Year U.S. Treasury Bond breaking above its long-term downtrend for only the second time in 40 years (red circle in the chart below).
As I mentioned at the time, the 10-Year U.S. Treasury is the single most important bond in the world. The yield on this bond represents the “risk free” rate of return for the ENTIRE financial system. This is literally the level against which all risk assets (stocks, commodities, real estate, etc.) are priced.
The last time the yield on the 10-Year U.S. Treasury broke out to the upside was in 2018. That’s when stocks took a nose-dive, dropping 20% in a matter of days:
As I also noted last week, there is a HUGE difference between what was happening in 2018 and what is happening now, however.
In 2018, the Fed was RAISING rates and shrinking its balance sheet. This time around, the Fed has rates at ZERO, has promised not to raise them for two years, AND is expanding its balance sheet by $125 billion per month.
Put another way, last time, the stock market drop was occurring as a result of Fed actions. This time it’s the result of Fed IN-action. And since Fed inaction means letting inflation run hotter and hotter, (which only makes bond yields rise more), we have to ask ourselves…
Is THE top in for stocks?
We’ll assess that in tomorrow’s article…
Editor, Money & Crisis