For the last 20 years, interest rates have been tumbling in what’s been an epic bull market in bonds.
But even on the way down, we experienced many short-term interest rate rallies.
“Since 1966, the 10yr treasury yield rose by 50bps or more in 3 months at least once every year,” wrote Deutsche Bank’s David Bianco in an April 25 note to clients. “In 2013, the 10yr jumped by 100bps during the taper tizzy. Interest rate volatility is likely to be higher this summer if the acceleration changes Fed guidance or investor expectations on the trajectory of the Fed Funds rate.”
Bianco thinks that the risk of yields rallying is high due to the fact that the economy is improving.
“Despite no 1Q GDP growth (SAAR), April’s Mfg ISM and jobs report restores the credibility of $US118-119 2014E S&P EPS or up 9-10% on avg. rest of year,” he said in a May 2 note.
With earnings multiples high in the stock markets and spreads tight in the credit markets, Bianco worries that a rally in yields could mean volatility across the financial markets.
This is one of the reasons why he thinks the next 5%+ move in the S&P 500 is down.
Bianco continues to see the S&P 500 ending at 1,850 this year, and he recommends waiting for dips to buy.
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