The disjunction between record-high U.S. stock prices and depressed bond yields has led some to doubt the sustainability of the euphoria on Wall Street.
But bond buyers say the shadow of central banks over global debt markets has prevented the rapid yield increases that would be expected to follow the equity market recovery from deep economic downturns caused by the coronavirus pandemic.
“Central banks will keep policy extremely accommodative for several years, effectively anchoring bond yields at around their current levels,” said Simona Gambarini, markets economist at Capital Economics.
Usually, yields and stocks tend to move together as they are both market-based barometers of the economic growth trajectory. So when the economy heats up, equities rise in line with higher forecasted earnings, and yields rise on the prospect of monetary policy tightening.
But that’s not what is expected to happen this time around.
Even as the Dow Jones Industrial Average
hit the 30,000 milestone this week, the 10-year Treasury note yield
has struggled to push above the 1% mark.
In the U.S., the Fed’s active presence has kept investors from selling or shorting Treasurys, and betting on higher yields, even if the raft of positive vaccine developments point to a sharp bounceback in U.S. and global economic growth next year.
The U.S. central bank buys a steady $80 billion of government bonds every month, and is expected to weight its asset purchases towards longer-dated maturities in the coming months, a move that has curbed bets on a steeper yield curve.
See: ‘Most’ Fed officials want to give better guidance to investors about its massive bond-buying program, minutes show
“The consensus view is that bond yields will behave differently coming out of this recession than they have in the past,” said Ryan Detrick, LPL Financial Chief Market Strategist.
Detrick noted the yield curve tended to steepen swiftly as the economy exited a recession. Investors anticipating the recovery and surge in inflation expectations would sell long-term government bonds, widening their spreads against short-term yields.
In the last seven periods that stretched from the start of a recession to the end of the first year of an expansion, the gap between the 3-month Treasury bill
and the 10-year Treasury yield widened by an average of 3.37 percentage points.
This spread stands currently at around 0.78 percentage points, with the 10-year note at 0.860%.
With forecasts pointing to the 10-year U.S. Treasury yield hitting 1.20% at the end of next year, a more drastic selloff in long-dated bonds beyond economists’ estimates would be needed to reach the extent of previous curve steepenings.