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10Y Crosses 3.00%, Just 50bps Left Until The "Disorderly Rotation"

Tyler Durden's picture




 

UPDATE: As opposed to CNBC's earlier premature note, the 10Y Treasury cash bond just broke above 3.00% for the first time in 26 months as China gets going...

 

We are assured by the great and good of the status quo that 10Y rates bursting through the 3.00% barrier (its highest in 26 months) will not hinder the housing recovery (as affordability plunges), slow equity buybacks (via increased cost of capital), or crush bank earnings (via AFS losses and NIM compression as the curve flattens). Bond yields are rising as a 'positive' sign for the economy... must be right? But wasn't it Steve Liesman just 2 weeks ago, amid his "best nailing it on CNBC in years", that proclaimed 10Y would hit 2.65% before 3.00%? As we warned 3 weeks ago, a move to 3.0% will create more meaningful outflows from retail and ETFs and 3.5% is the trigger for a "disorderly rotation," from risk to cash.

 

10Y shifts rapidly towards 3.00% for the first time since July 2011...

 

oh and by the way, for those who are more concerned at the 'pace' of the move, as opposed to the level of rates - this is the fastest rise in mortgage rates in 5 years...

 

and 2Y yields look set to close above their 200-week average - historically a huge trend change signal...

 

But wait, none other than the "best nailer in CNBC history" proclaimed just 2 weeks ago that the 10Y would hit 2.65% before it hit 3.0%?

Forward to around 5:00 for his explanation of the bond market's reaction...

 

 

Oh well, given that the Dow has gone nowhere since the FOMC minutes that Liesman "bet the farm on", it is no real surprise...

 

and 10Y yields rose from 2.81% to 2.89% on that day and never looked back...

 

and just remember why rising rates IS an issue for equities, no matter what your friendly local commission-taker says:

With a 14bps move higher in 10-year interest rates over the past two days, the key question is how much will it take to accelerate outflows from bond funds enough to lead to wider high grade credit spreads? While we already expect outflows from (non-short term) funds to increase based on the move in interest rates so far (see Figure 4 at the end of this piece), clearly a move to 3.0% on the 10-year over the next several weeks would lead to much more meaningful outflows. Whether such scenario actually leads to wider credit spreads depends on the extent of institutional buying interest at the new more attractive levels. That in turn depends on whether interest rates are perceived to stabilize at the new higher levels – thus the other key variable to watch is rates volatility.

The bottom line is: if firms are unable to borrow cheap to fund the buybacks and dividends that investors have become so enamored with (and conditioned to); a disorderly rotation from rates will in fact have a major negative on equity prices as capital costs surge making shareholder-friendliness uneconomic... considering by far the greatest aspect of EPS beats has been a reduction in the float via buybacks, the fear should be that the much-hoped-for rising rate scenario (lauded by so many as indicative of great things ahead) is in fact nothing but flow-driven abd will crush EPS.

 

Charts: Bloomberg

 

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