January 17, 2022

(Bloomberg) – Treasury yields are rising rapidly as investors expect the Federal Reserve to raise interest rates in March and follow with other moves throughout the year.

The 10-year US Treasury yield has risen nearly 30 basis points since the end of 2021 as market participants begin to raise rates earlier and at a faster pace, with speculation on a 50 basis point move in March slipping into discussions.

Here are some thoughts on what the effect of rising Treasury yields could be:

Influx shortage

“The anticipation of higher returns is already having an impact on the broader market, which has had a weak start to the year for equities,” said Adam Reynolds, managing director for Asia-Pacific at Saxo Capital Markets. Pt. by email on Monday. “Typically we see inflows in January leading to outperformance. This year that hasn’t happened. The most important consideration for me is the prospect of an early start to balance sheet size reduction Any large and early withdrawal of liquidity will have a negative impact on asset prices.

“We are seeing a weak start to the week for equities and fixed income,” Reynolds added. “I expect that to continue throughout the week and may even start to pick up speed.”

Growth versus value

“The outlook for the Fed, interest rates and economic growth suggests that equity investors should balance their exposures to growth and value,” said strategists at Goldman Sachs Group Inc. led by David Kostin , in a note on Friday. “Our rate strategists expect yields to continue to rise, a momentum that should support value rather than growth. However, their 10-year nominal yield targets of 2.0% by the end of 2022 and 2.3% by the end of 2023 charts a more gradual trajectory than the volatility the market has faced in recent weeks.

“Our economists expect the decline of the Omicron wave to lift GDP growth from 2% in the first quarter to 3% in the second quarter, supporting value stocks,” the strategists added. “But they expect growth to slow to a 2% pace by 4Q 2022, the type of environment that typically supports growth stocks.”

Dollar Bear Betting

“The dissonance associated with the juxtaposition of higher Treasury yields and a weaker US dollar resulting from the Fed’s underlying hawkish divergence (vis-à-vis the European Central Bank and the Bank of Japan) reveals the many tensions that remain,” said Vishnu Varathan. , head of economics and strategy at Mizuho Bank Ltd., in a note on Monday.

“To the extent that a hawkish Fed raises inflation expectations lower, real UST yields have climbed; catch up and potentially outpace rising nominal yields,” he continued. “And if sustained, this rise in real rates should inspire USD pull, if not rebound. If indeed the real US dollar (rate) rises, one-sided bearish bets on the dollar will fail.

Big tech

“A weak tech season coupled with the higher rate environment, which we believe is boosting sales in the Nasdaq 100,” said Michael Purves, managing director of Tallbacken Capital Advisers LLC, in a note Sunday. “And it’s hard to think that won’t trickle down to broader index pressure. Yes, the value should see the rotational dynamics, but that the SPX’s big tech heft is a heavy boat anchor to carry if it’s to be sold.

“Having said that, it’s interesting to see that while the SPX options market is somewhat poor, the VXN (a VIX for the NDX) has been steadily climbing,” he said. “Since early December, the VXN – VIX spread has climbed above the VIX in tandem with the underperformance of the NDX against the SPX. And both of these metrics have been consistent with the rise in the 10-year Treasury yield and the warmongering pivot.

Actual reservations

“Overall, rising real yields are negative for risk assets,” Sue Trinh, head of global macro strategy for Asia at Manulife Investment Management HK Ltd., said in comments Monday. “We find that higher real rates are probably more painful for risky assets than higher nominal rates.”

She added, “Essentially, the correlation between real returns and risky assets has become stronger and more negative over the past five years.”

Cryptographic divergence

There has recently been a big divergence in performance between the biggest cryptocurrencies and some of the emerging ones, notes Jonathan Cheesman, head of OTC and institutional sales at crypto derivatives exchange FTX, who pointed out the weak returns from companies like Bitcoin and Ether over the past month, while tokens like NEAR and Fantom surged.

“This decorrelation could be related to the macro environment (i.e. Fed tightening) in two ways,” Cheesman said. “1) Traditional investors have focused on large caps and since a large part of their thesis was monetary inflation, they are likely exiting. 2) While the crunch is coming, it’s not there yet. There is still a tremendous amount of liquidity in the system, so we are seeing a great gyration below the surface without as much volatility at the index or aggregate level.