After a dismal start to the year, stocks logged an impressive springtime run that in the third week of April landed the S&P 500
Â and the Dow industrials
Â about 1% from all-time highs.
Yet even as stocks reversed course, the Treasury market didnât exactly follow suit. Demand for Treasurys has not subsided and Treasury yields, which move inversely to prices, remain close to the nearly three-year lows reached on Feb. 11. On Friday, the 10-year benchmark yield
closed at 1.705%, only 50 basis points above the Feb. 11 lows. The S&P was near 2,046 Friday, well above the 1,829 it closed at on February 11.
Treasury prices soared at the beginning of the year, as global stock markets tumbled and frightened investors flocked to haven assets, mainly government debt. But, as the following chart shows, since Feb. 11, the 10-year yield did not match the S&P in its rebound.
Some analysts have claimed that low bond yields would help stocks advance because they reflect continued easy borrowing for growing companies. But according to a J.P. Morgan report released this week, bond yields staying low is actually now becoming the reason why stocks are struggling to perform. In other words, the same jitters about global economic slowdown that have pushed Treasury yields to multi-year lows are also preventing stocks from gaining substantial ground.
According to the report, soft economic growth, along with accommodating central bank policies across the world, have pushed yields lower and should continue to keep them subdued.
âFor broad equity indices to advance, one needs a pickup in activityâlow yields might not be enough anymore,â the analysts wrote, recommending a âcautious equity stanceâ and allocation to sectors typically viewed as safety plays in times of market turbulence, namely utilities, telecom and real-estate.
Projecting that yields will stay low, J.P. Morgan analysts also recommended selling cyclical stocks, as their prices are affected by ups and downs in the economy. As the following chart shows, stubbornly low Treasury yields suggest sluggish economic growth which in turn hurts cyclicals.
Bottom line, the divergence between Treasury yields and equity indexes suggests that one of the two markets â or both â are due for a correction, said Brad Friedlander, head portfolio manager of Angel Oak Capital Advisors.
According to Friedlander, the recent euphoria in equity markets has been centered around the Federal Reserveâs low-rate policy support, while the Fedâs patience has also caused some complacency in the Treasury market.
A likely scenario would be that the two markets would âmeet in the middleâ with equities moving lower and yields ticking up, Friedlander said. And for both, that implies muted returns for the near term.