A new era of big government and excessive public sector borrowing remain the pertinent risks for US and global equities. The slow grind in Treasuries continues, with 10-year yields up another ten basis points this week (to 1.74%).
The Fed remains wedded to its policy of zero interest rates. Two-year yields rose just two basis points (to 0.16%) this week despite strong economic data. The Philly Fed’s manufacturing survey, the first reliable take on economic activity in March, showed a blistering recovery.
The Fed does expect higher inflation but expects this to be short-lived. The bond market is less sanguine: break-even inflation rates for 10-year Treasuries continued to move higher, rising to 2.31%, up five basis points.
But it is the rise in indexed-linked yields, also up five basis points, that matters the most for equities: the sharp dive in real yields in recent years, intensifying in 2020, has been the flipside of QE policies and the surge in investment into information technology.
Ten-year indexed-linked yields are still negative (-0.57%). Nevertheless, the market is signaling a major reversal in one of the most important props for equities, one that will also hurt the high yield corporate bond market.
Summary
- Fed committed to low rates
- But markets wary of higher borrowing costs
- Keep an eye on high yield market, a canary
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