Let’s revisit a chart you should have been a bajillion times this year.
It’s a 5-year look at the S&P (red line) vs. the yield on the 10-year Treasury (blue line).
There’s a natural reason they tend to trade together: When people are bullish, they buy equities, and move out of risk-free Treasuries, causing both stocks and yields to go up at the same time. At least that’s how it’s been up until very recently, when the equity market started taking off, but yields remain mired in the basement. We got more of that today: New highs for the S&P 500 and almost new upward movement in yields.
In a note out today, Goldman reiterates what lots out of people on the street are saying, which is that yields are too damn low. They chalk it up to the glut of safe-haven buying (which is perhaps a bit tautological) that’s the result of the European crisis and the lack of good safe-havens within the Euro.
What’s key to the argument is that the phenomenon of ultra-low yields is being seen in a wide variety of countries: Australia, Japan, Canada, etc. What they all have in common is their own currencies (and thus lack of default risk).
Our Sudoku model indicates that 10-yr yields for the USA, Germany, Japan, the United Kingdom, Canada, Australia and Sweden are trading too low compared to our own and consensus’ macro expectations of growth, inflation and monetary policy stance.
Last week, we used our Sudoku model’s results and performed an ad hoc exercise to look for special factors that could help explain part of the gap between ‘fair’ and actual value in the 10-yr US government bond yields. We found that the combined effect of a deterioration in the Euro area crisis since the announcement of the Greek PSI in July and the Fed policy has reduced the 10-year Treasury yield by about 45bp.
None of this is really satisfying, because it doesn’t explain what happened just, basically since December, that caused yields and equities to go in two different directions (up vs. flat). Blaming the Fed only gets you so far, since this didn’t happen through two QEs and a twist.
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