The chatter of a tapered tantrum subsided after the big move at the beginning of the year in the ten-year treasury.
But the factors that led to the short sale in Treasurys are still at hand. Most important among them are the deployment of COVID-19 vaccines, as well as the enormous fiscal stimulus already being implemented with more in the offing, the pent-up spending power for household savings and easy monetary policy.
Scott Peng, the founder and chief investment officer of New York’s investment manager, Advocate Capital Management, says a perfect storm is unleashed. Its model estimates the ten-year treasury yield TMUBMUSD10Y,
will jump 162 basis points and another 160 basis points next year – which is much better than the market estimates of around 17 basis points for profit in each of the next two years. The ten-year yield yielded 1.12% early Wednesday.
Peng, formerly Citi’s chief interest rate strategist and one of the first to spot pricing in Libor, says his model does not even include an additional fiscal stimulus from the Biden government, which would have a $ 1.9 billion coronavirus relief plan proposal, as well as additional infrastructure spending.
At the heart of his view of a rising interest rate is the historical link between nominal growth in gross domestic product with short- and long-term interest rates in the US, UK, Germany and Japan. Long-term regression reflects a 50% ratio between GDP growth and treasury yields since 1960, although recent history suggests that the ratio has dropped to 27%.
Even the lower correlation level suggests that the impact of vaccines, pent-up spending power, increase in government debt and monetary stimulus will push yields higher.
Would such an increase in tariffs not cause alarms at the Federal Reserve? Peng calculates that the Fed would have to simplify the size of its quantitative easing to compensate for the projected rate hike in 2021. “A QE rate of $ 300 billion a month will exceed the 2020 QE and is unlikely to be sustainable for any long period of time, especially if the economy recovers well,” he says.
Peng did not extend his analysis to equities, but the implications would be simple. An increase in returns will make relative valuations more unattractive, although it may create conditions for value stocks to thrive after a decade of underperformance.
The buzz
GameStop GME,
The stock rose 2% in pre-trading after tumbling 60% to $ 90 on Tuesday. The short print by users of the Reddit WallStreetBets forum raised the share to $ 483 last week. AMC Entertainment AMC, cinema operator,
which tumbled 41% on Tuesday also rose 2%.
Online retail giant Amazon AMZN,
predicted revenue and revenue from the fourth quarter, and the news that Jeff Bezos will retire as CEO later this year, focusing on new products and early initiatives. Andy Jassy, head of his fast-growing cloud division, will take over as CEO of the entire company.
GOOGL alphabet,
GOOG,
jumped 7% in pre-trade, as Google’s parent company easily beat fourth-quarter revenue estimates, boosting search revenue and its fast-growing cloud business.
There is a number of revenue on the deck, including the payment service PayPal PYPL,
and online auction service eBay EBAY,
after the close of trading.
On the coronavirus front, pharmaceutical GlaxoSmithKline GSK,
will pay up to € 150 million to CureVac CVAC,
to develop next-generation vaccines targeted at various variants. Glaxo will also help produce up to 100 million doses of first-generation CureVac vaccine, a boost for Europe, which is slow to export vaccines. Separately, preliminary research finds the AstraZeneca AZN,
– Oxford University vaccine provides protection for up to three months before the second dose is administered. New cases of coronavirus in the US dropped to 115,619 on Tuesday, from a peak of 243,996 in mid-January, according to the COVID-19 detection project.
The economic calendar contains the ADP estimate of the wage statements in the private sector and the index of the Institute of Supply Management. A measure of China’s services sector is below estimates.
The markets
The Nasdaq-100 NQ00,
contract led to an advance in shares futures contracts ES00,
to the results of Amazon and Alphabet. The dollar DXY,
was resistant.
Italian shares I945,
Mario Draghi, former president of the European Central Bank, will become the next prime minister.
The graph
In a letter to investors, hedge fund Crescat Capital said it was starting the scene for a massive investor shift from overvalued mega-cap growth funds and fixed-income bonds, and undervalued materials, energy and other commodities. It is said that if it can only concentrate on one chart for the next three to five years, then that is the commodity ratio. ‘The chance to buy gold shares and sell overvalued major stocks looks like 1972. In just two years in 1973-74, the S&P 500 SPX,
decreased by 50% while gold shares increased fivefold, ”it is said.
Random reading
Speaking of Reddit posts – a study finds that language use on the platform can predict future breakdown of relationships.
Sounds like the beginning of a screenplay for a new Indiana Jones movie – mummies with golden tongues found in Egypt.
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