So earlier today in “To ‘Tantrum’ Or Not To ‘Tantrum’, That Is The Question,” I said the following about the juxtaposition between hedge funds’ big Treasury short and still long equity positioning:
…if the highly anticipated repricing of yields higher turns out to be …err… higher-er–er than expected, the long equities side of this bet is probably going to be offsides as a dreaded “tantrum” event transpires.
Long story short, a hawkish Fed is only bullish for equities to the extent it reinforces the reflation narrative and thus puts a bid under risk. That’s how the virtuous negative stock/bond return correlation survives unharmed. The idea is that rising yields are seen by equities as a good thing and thus a reason to keep buying stocks. Or, more simply: the Trump trade lives on.
What you don’t want, is to see stocks sell off with bonds. And you definitely don’t want to see that yet. That is, there’s supposed to be a cushion here – a kind of Goldilocks, probationary period where yields can rise and stocks will see that in a positive light. Most analysts will tell you the pain threshold beyond which stocks can no longer rally as bonds sell off is around 3% on 10s.
Well, over the past three days, bonds and stocks have sold off together:
And note this:
In this case, correlation equals causation – quite literally (get it?).