Tuesday, November 2, 2021

What if there was a "Great Bond Reset" and equities did not notice?


The front-end of yield curves for several countries have gone through a massive repricing in October.  US 2-year Treasuries have doubled in yield during the month. Australian 2-years have increased by a factor five. There also have been significant moves in Sweden, Canada, and the UK. The great pandemic liquidity surge is over, or at least fixed income traders have said that the world has changed with higher inflation and policy will have to play catch-up. I don't want to say that bond vigilantes are back, long-end moves have been muted, but policy front-runners have made a statement. 

So what do risky assets like US stocks have to say about this repricing? Not much. October saw a 7 percent gain in the SPY, a gain of over 8 percent for the top 50 stocks, and an increase of over 9 percent for growth stocks. High beta stocks are up over 50 percent above the benchmark for 2021. 

Rates rises pushed forward in 2022, no problem. Slower third quarter GDP, no problem.  Taper likely to start soon, no issue. Temporary inflation through the first half of 2022, still no worries. Yes, funds are available, but does this look like an early recovery environment? This looks like a cusp point into a new monetary policy regime. 

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