Deutsche Warns Of Imminent “Domino Impact” For Stocks From Bond Carnage, Soaring Dollar
One of the more confounding aspects of the record bond selloff experienced in the past few days, is that it not only left broader equity indices unscathed, but took place as the Dow Jones hit a new record high. This, as Goldman explains, is problematic, given that the ‘low yields for longer’ theme, i.e., the infamous “Fed Model” which was used to justify record high stock multiples purely as a function of record low bond yields, that underpins the valuation of several financial assets is under scrutiny. As Goldman puts it: “the continued focus” on the spike in bond yields “seems to us justified.”
The reason, as Goldman’s Francesco Garzareli cautions, is that “some of the ongoing price action in fixed income ties up well with macro developments and remains overall favourable for risk assets. But other traits of the repricing seem inconsistent with fundamentals, and are potentially destabilizing for broader markets.” Where things get interesting, is where Goldman and Deutsche Bank diverge on their opinion whether the recent blow out in yields will serve to limit future equity gains.
At around 2%, US 10-year Treasuries are now at the low end of the valuation band around our preferred measure of macro ‘fair value’ in which they fluctuate 68% of the time. Bonds in Germany, the UK and Japan are priced similarly on this dimension, as shown in Exhibit 1 below (by comparison, in the Summer, the degree of departure of yields from their ‘fair’ levels was a very rare event, occurring on average less than 5% of times).
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