We often use terms like “stock lever” and concepts like asset allocation to discuss the conventional wisdom of stock prices and bond yields moving in unison. I’ll be the first to tell you what a bad idea that is if you’re expecting a certain amount of movement in one to correlate with a predictable amount of movement in the other. Just a week and a half ago, I’d been looking for a break above 2600 in the SP to coincide with a challenge of 2.75 or 2.82% in 10yr Treasury yields. But instead, bonds were able to remain well under 2.75% even as stocks suggested a breakout.
That’s not to say there’s no correlation–far from it! In fact, I would consider the next big move in stocks to be one of the most important sources of inspiration for the next big move in bonds. With that in mind, it’s worth noting that stocks are currently in between ranges, with the recent momentum threatening a break back into the range seen before December’s big sell-off.
It’s not entirely clear how bonds would react to such a thing. In relative terms, they’ve been more resilient than stocks would suggest, having only retraced a portion of their late December rally (whereas stocks have fully erased their late December sell-off). Either way, any break above 2.82% would be significant.
The scariest possibilities (a return to the “before” range) would likely require a perfect storm of bad news for bonds (shutdown over, trade deal inked, econ data recovers). It seems like a tall order for all that to happen any time soon. But there are headwinds for gains as well–not the least of which being the fact that Treasury issuance certainly won’t be going down any time soon.