Back in November 2016, when bond yields were surging in the aftermath of Donald Trump's election, Goldman, together with SocGen, JPM, RBC and various other banks, answered the question that has once again become especially relevant: how high can 10Y bond yields go before they start to hurt equities?
Over a year ago, Goldman answered that "the equity market is still at a level that can cope with moderately rising bond yields. We estimate that a rise in US bond yields above 2.75% or probably between 0.75-1% in Germany would create a more serious problem for equity markets: at that point we would expect the correlation between bonds and equities to be more positive - i.e., any further rises in yields from there would be a negative for stock returns."
2.75% is also the level above which JPM's head quant Marko Kolanovic said the 10 Year would begin to cause problems for stocks: "should bond yields continue increasing (e.g. 10Y beyond 2.75%) this will risk an equity sell-off that usually triggers a broader deleveraging of var-based strategies."
More recently, Jeff Gundlach warned that "if the 10Year goes to 2.63%, stocks will be negative impacted." As of this morning, the 10Y yield rose as high as 2.7216% - a level not seen since early 2014 - before fading some of latest surge.
So fast forward to today when overnight SocGen's strategist Kit Juckes rekindles the conversation of how long before the bond selloff morphs into an equity selloff - one which both Bank of America and now Goldman expect will hit over the next three months - by comparing equity investors to frogs who are about to be caught in boiling water.
“The frog analogy (it doesn't realise it's getting boiled until it's too late to escape) is likely to be popular in 2018” - Socgen— zerohedge (@zerohedge) January 29, 2018
In his note "How long before the bond sell-off heats up markets?", Juckes points out he may "as well get an early vote in for ‘boiling frogs in rising yields' as the next market theme." Still, contrary to November 2016, the Socgen strategist doesn't see a critical resistance level beyond which stocks tumble, at least not yet.
A slow-motion rise in bond yields is not, yet, threatening risk sentiment in equities, credit or EM. As long as it doesn't, yields can rise on a tide of decent economic data and expectations of higher inflation thanks in no small part to rising oil prices. The frog analogy (it doesn't realise it's getting boiled until it's too late to escape) is likely to be popular in 2018. For now, we're basking in synchronised growth and thinking happy thoughts......
Those thoughts may be far less happy if the market takes a long, hard look at the crashing US savings rate and realizes its broad, deflationary implications for the broader economy, and the fact that the recent, GDP -boosting spending surge is coming to an abrupt end.
And while we were disappointed by Juckes' lack of a concrete target for a level in the 10-Year which would slam stocks, conveniently his employer put out a table back in November 2016 which answered the question on everyone's lips: when will bond yields start to hurt equities. Or, as SocGen would say: "we are already there."