I’ve hinted multiple times over the past several weeks at a possible breaking point for equities vis-à-vis the ongoing, reals-led bond selloff and particularly the bear steepener. We might’ve reached that breaking point on Tuesday.

Stocks were meaningfully lower into the US afternoon, and the proximate cause was another sharp selloff at the US long-end. It was quite ugly, with yields higher by 10-15bps from the seven-year sector on out.

I assiduously avoid the rumor mill, and I try to shield readers from it too (“You can’t handle the truth!”), but I’d be remiss not to mention the yen. Indeed, I already mentioned it, albeit obliquely, in “Bond Rout Turns Vicious As Bear Steepener Extends,” when I cautioned on the possibility of official intervention to curb foreign currency weakness.

On that score, there was no shortage of BoJ/MoF speculation as the yen breached 150.

FX traders have been on “yen-tervention” watch for months. I don’t know if 150 is the level, but it’s a level. I’ll quote myself, from the linked article above. “Inexorable dollar strength does raise the odds of foreign intervention on the margins.” Intervention is Treasury supply at a time when deficit-related supply concerns are pervasive.

For the laypeople out there, I’d suggest the more important takeaway is just that the rise in real yields is simply too much for stocks at this point. 10-year reals hit 2.44%, the highest since January of 2009.

Consider this: 10-year reals are 359bps higher than they were in July of 2021. And the S&P is less than 4% lower now than it was then. Are growth expectations that much better now? Somehow, I doubt it.

As ever, I’m not suggesting it’s all about to “fall apart” or that an outright crash is imminent. All I’m saying is that America’s growth stock-heavy, duration-sensitive equity market ignored stubbornly elevated real yields for most of this year, and the disparity is simply too wide now for stocks to plausibly brush aside.

The figure below, from Goldman, is updated. I used it, along with a few related visuals, in “Rates And Stocks From The Rooftops+“. You’re encouraged to peruse that article for some additional color (and another dose of grating editorial humor), but the CliffsNotes version simply says stocks have to de-rate, reals have to recede or both.

The correlation between real rates and equities is now sharply negative again, and as the figure shows, there’s a helluva big gap to close.

There’s nothing chiseled in any stone tablets that says valuations and inflation-adjusted benchmark rates “must” recouple, but the tight relationship isn’t exactly an accident — the link between equity multiples and reals is intuitive.

The Dow erased the entirety of its 2023 gains on Tuesday. This isn’t exactly a groundbreaking observation, but multi-asset investors grappling with the most vexing bond selloff in a generation can scarcely afford for stocks to crumble. At least there’s cash.

“With bond markets again losing money and cash yielding 5%, the global 60/40 portfolio is only just beating US cash this year and has only matched cash over the past three years,” SocGen’s Andrew Lapthorne remarked.

“Equities are facing two significant headwinds in the coming years,” he went on, in the same note. One of those headwinds is “a valuation hangover brought about by years of depressed bond yields.”

Bonds, suffice to say, are the bane of equities’ existence currently. They’re oversold (the bonds, I mean), but the supply overhang is a psychological impediment.

“[The] term premium remains topical, as do questions regarding who will ultimately step up and underwrite the growing borrowing needs of the Treasury Department,” BMO’s Ian Lyngen and Ben Jeffery said, after the smoke cleared on Tuesday. “At least the Federal government is still open,” they added.