Pro Perspectives 1/11/21

January 11, 2021

We talked about the push higher in yields last week. 

That continues today.  The 10-year yield is now trading up to 1.14%.  That’s still very low.  But the rate of change is huge.  That's a rise of 25 basis points in a week, against a very low base. 

This is a potential disruptor to keep an eye on, for stocks. 

Remember the taper tantrum? 

In 2013, just a few months into QE3, the Fed began setting the table for reducing the size of its bond buying program, and telegraphing a QE exit strategy.  Rates went crazy.  In four months the 10-year traded up to 3% from 1.6%.   As a result, in June of 2013, mortgage rates jumped a half a percentage point in a week (the biggest one week move since 1987).  And that was in a very, very fragile housing market.  Stocks had an 8% drawdown and then a 5% drawdown within those four months.  

So it created volatility, but stocks ended the year up big in 2013.  

This time around, a sharp move higher in rates would be painful for confidence, especially if it involved foreign selling of U.S. Treasuries.  But importantly, we don't have to wonder if/when the Fed might respond to a destabilizing force.  We know they are on red alert and will do anything/everything to maintain confidence and stability — even if it means outright buying stocks.