Morning Note: The Problem With Higher Yields

Treasury yields are spiking big this morning as the world anticipates a robust mix of growth and inflation over the coming months. 

And while one might think that the combination of utterly huge government spending (much more to come) and the real threat of inflation would have the dollar tanking (it ultimately will!), the allure of higher U.S. interest rates actually has it trading up a bit this morning.

And while stocks are in the green this morning on those (government sponsored) growthy prospects, rising treasury yields ultimately present a serious problem… Looks like options traders are pricing in some of that risk this morning; the VIX is up a big 8.16% as I type!

We’ll explore these dynamics in our upcoming main weekly message…

Here’s a teaser:

“The fact that the equity market has feasted on historically low interest rates, and that present valuations can only be justified by, yes, historically-low interest rates, those high growth names’ valuations in particular simply will not hold up against a rising discount rate.

Which of course leaves the Fed in quite the pickle. Their duo mandate includes keeping inflation steady, which means it’s their job to tighten monetary conditions (read hike interest rates) as inflation accelerates past a certain point.”

As you’ll read in that note, there’s a pathway leading around that pickle that the Fed virtually has to follow, which is good news for certain sectors — the ones we’re emphasizing in our core mix…

3 of the 16 Asian markets we track were closed overnight, of the 13 that were open 9 finished in the green.

Europe’s mostly green as well this morning, with 13 of the 19 bourses we follow currently trading higher.

U.S. major averages are starting the session higher across the board: Dow up 113 points (0.38%), SP500 up 0.25%, SP500 Equal Weight up 0.25%, Nasdaq up 0.34%, Russell 2000 up 0.29%.

The VIX (SP500 implied volatility) is up 9.06%. VXN (Nasdaq 100 i.v.) is up 3.53%.

Oil futures are up 0.79%, gold’s down 1.40%, silver’s down 0.20%, copper futures are up 0.89% and the ag complex is up 1.26%.

The 10-year treasury is down big (yield up big) and the dollar is up 0.07%.

Led by oil services, energy, banks, miners and ag commodities, our core mix is up 0.57% to start the day. Gold, utilities, the yen, healthcare and gold miners are laggards.

As I’ve illustrated aplenty over all these past years of blogging, market metaphors forever abound in nature… Make no mistake, a market trend exists on the fertilizing from the opposite trend that preceded it. Itself sowing, and ultimately fertilizing, the seeds of its inevitable opposite to come, particularly as it matures.

As Lucretius put it:

“Nature ever upbuilds one thing from other, suffering naught to come to birth but through some other’s death.”

Have a nice day!


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