The reverse yield gap, based on 10-year Treasury yields, shows that the equity market could soon be more expensive than any time since the dark days of the credit crunch. Based on 30-year Treasuries, it already is. Keeping a ‘lid’ on the bond market is going to be important if the stock market is to continue levitating. In this respect, Mr Powell and Ms Yellen will be pleased with markets last week: both policy makers managed to provide sufficient reassurance to cap the recent rise in Treasury yields.
Mr Powell – testifying in front of the Senate’s Committee on Banking, Housing, and Urban Affairs – tried to play down the rise in yields: it is a natural consequence of falling Covid-19 infections, accelerated vaccinations and economic recovery. There is nothing to fear. The FOMC chair “was not worried”.
Ms Yellen is touting the case for higher taxes to pay for infrastructure investment. Bond investors will breathe a sigh of relief.
But the US Treasury Secretary, acknowledging the economic recovery, conceded that “asset valuations are elevated by historical metrics”.
Summary
- Mr Powell and Ms Yellen soothe bonds
- But valuation issues persist
- Competition hits communication services
