That’s the story of this past week.
All year we’ve been talking about the biggest anomaly in the market: The fact that stocks were rallying hard, while Treasury yields were staying flat, indicating ongoing recession and disinflation.
As you can see from the chart below, for the past 5 years, the S&P 500 (red line) and yield on the 10-year Treasury (blue line) have mostly moved together, only to become totally separate late last year.
Well, this was the week the blue line finally started to shoot up, opening up the possibility that the two lines will converge yet again.
So the question then is: What does this all mean?
Our favourite answer to this came from Nomura’s George Goncalves, who argued that the rates on US Treasuries were too low thanks to extraordinary buying from European investors, who were shunning their own domestic bond markets.
As part of the general “risk on” move of the year, they’re finally returning home, allowing rates to rise.
And it’s noteworthy that the increase in rates coincides with other signs of a diminished appetite for risk free assets, including a selloff in German bunds, and a selloff in Japanese yen.