The market anomaly of the year is without a doubt the growing gap between stocks and Treasury yields.
For years, equities and yields have moved in the same direction, for natural reasons. When people are buying equities, they’re selling Treasuries, causing yields to rise. Or at a minimum, an equity rally usually indicates some type of expectation of growth and inflation, that would also cause Treasury yields to rise.
What we’ve been talking about all year is how since December, we’ve seen equities rally hard, but Treasuries flatline.
Here’s a 5-year look at the S&P (green) vs. the 10-year yield (orange).
There are various theories for the disconnect.
One is that it has to do with the Fed, and expectations for QE3, and more bond buying, but that’s not totally satisfactory, since this disconnect didn’t emerge during QE1, QE2, or Operation Twist, last summer (at least not to the same dramatic degree). It could also just be a sign of a huge, global demand for risk-free assets at a time when the available pool of risk free assets is shrinking, due to troubles at European banks or governments.
Everyone expects the gap to close at some point, but it’s persisted longer than anyone has thought.
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