10 Year Under 2.7% As Legacy Curve Steepeners Cause Much Pain; Yields Imply 75 Points Of S&P Downside
The pain for the biggest groupthink trade over the past year, the curve steepener, is getting unbearable. The 10 Year is now pushing below 2.70%, last hitting 2.69%, the lowest in over 16 years, as the 2s10s is at 219 bps, or the tightest since April 2009. At the same time, deflationary CMS trade are printing money. Look for many more steepener unwinds, especially if the 10 Year continues on its steady path to 2.5%. At this rate the record level may be hit in as little as 24 hours. And unlike before, equities tamely follow through the deflationary path suggested by credit. And now that equities have finally regained some semblance of rationality, they have a long way to drop: according to the mid-term chart between 10 Year and stocks, the fair value of stocks is around 1,025, or 75 points lower. We expect this level will be recaptured shortly.
Much more room to fall for stocks.