Investing.com — Capital Economics told clients in a note Monday that the recent climb in long-term Treasury yields is a puzzle given softer U.S. data, but argued it would take a far sharper move to threaten the equity rally.
“Treasury sell-off not (yet) a major worry for stock markets,” chief markets economist Jonas Goltermann wrote, adding that yields “would probably need to rise quite a bit further before that became a major headwind for equities.”
The firm said recent U.S. data has taken the wind out of the sails of the hawks on the FOMC, with softer activity readings and marginally better inflation news pushing the market-implied probability of a September hike to its lowest since the June meeting.
Against that backdrop, the continued rise in long-term yields is surprising, Capital Economics said, and may partly reflect unease over Chair Warsh’s ambiguous post-FOMC message.
Minutes from the last meeting could reassure the Treasury market if the rest of the committee appears more inclined toward tight policy, the firm said, while Warsh’s Jackson Hole speech is the next major test.
Capital Economics noted the roughly 70 basis point increase since late January has not held back the S&P 500, which rebounded from its June-July wobble after a strong earnings season.
Rising yields have more often accompanied stronger equity performance in recent years, it said, and the surge in corporate earnings gives the market a stronger buffer against higher discount rates.
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