Bring Back Bonds — I can’t imagine any meme-stock-buying ape reading this has ever bought a U.S. Treasury.
They’re boring and give low returns, but their relationship to the stock market is ironclad.
As rates go up, bond yields go up, and as bond yields go up, stock prices go down, all else being equal.
So, with bond yields at their highest levels in a decade, is the stock market due for another correction?
It’s hard to say what’s already been priced in. Betting markets are all but sure of a 75bp hike this week, so it’s pretty safe to say that wouldn’t be a surprise.
Back in 2020, everybody was dumping stimmies and whatever other cash they had into stocks because you couldn’t get a return elsewhere. Once stocks hit lofty valuations, it was into magic internet money and NFTs.
But with bond yields soaring past the dividend yields of most S&P companies, the game is changing. Now there are real tradeoffs.
You may have scoffed at your parents’ 60/40 stocks vs. bonds portfolio a few years ago, but 3 and a half percent per year with minimal risk doesn’t sound so bad when tech stocks are falling 10%+ in a day.
A lot will depend on what the terminal rate, or peak Fed funds rate during a hiking cycle, ends up being. Traders are expecting around 4 and a half percent-ish.
If that goes to five, the market could melt down. If it ends up at four, we could see a face-ripper.
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