Homebuilder sentiment fell for the 10th straight month in October, down eight points to 38, and more than half the level of just six months ago. Yet the 10-year Treasury yield keeps pushing higher, climbing to 4.14% yesterday, the highest since July 22nd, 2008. To reiterate, this is a precarious scenario for the stock market.
The short end is pulling up the long end. The yield on the 2-year Treasury is now at 4.55%. Despite the initial equity and Treasury market reaction, the September CPI report was hawkish, and negative for risk assets, even though durables disinflation is coming through fast.
Real yields in the US are now above 1.7% across the curve. Central Banks are not able to bail out housing or stock markets this time. The confirmation of BoE APF Gilt sales for Q4 is indicative of this, and a timely warning.
There are other compelling factors behind the rise in Treasury yields: 1) markets are beckoning a shift in the BoJ’s policy stance; 2) US-China tensions are escalating rapidly; and 3) UK inflation numbers again surprised to the upside.
The 30-year UK Gilt yield nevertheless fell back to 3.99% yesterday. Real yields in the UK have reversed course too, with the 20-year real yield (instantaneous forward) down from a close of 1.76% last Friday to 0.99% as of Tuesday. Linkers rallied sharply again Wednesday, and even more this morning, pushing real yields towards negative territory. The rapid reversal in UK real yields is a function of both fiscal tightening and a resumption of LDI strategies. Higher inflation in the UK is forcing corporate pension sponsors to move back into index-linked gilts.
US TIPS yields may provide a better indication currently of where real yields lie globally (> 1.7%). In the UK, real yields continue to be distorted by LDI.
