Hey There Income Hunters,
Ten-year bond yields finally crossed a critical threshold — the dividend yield on S&P 500 stocks.
Griff, why is this so important, you might be asking?
Because … when bond yields are above equity dividend yields, they offer an alternative for Income Hunters.
ay soon be forced to rely on real investors and foreign buying …
There are two reasons for this …
- Federal Reserve Chairman Jerome “J-Pow” Powell has shown no concern for bond yield
- Banks’ capacity for absorbing more bond supply may be reduced if capital requirement exemptions are allowed to expire this month
What are the odds investors will step in?
And what interest rate (yield) levels on the upside could trigger investor concerns on higher debt costs and potentially a larger equity market correction?
Fund Managers Fear 2%
According to a Bank of America global fund manager survey (below), 43% percent of investors now think 2% is the level for 10-year yields that would trigger a 10% correction in stocks …
In SPDR S&P 500 ETF Trust (SPY) that would take us down to the 358.50 …
Here’s why I don’t think we’ll go to 2%.
Going back to 1988, the only time the 10-year made a move that large was when the Fed was tightening …
This chart below shows the Federal Funds Rate — the target interest rate at which banks lend reserve balances to other banks on an overnight basis — with the 10-year yield channel since 1988 …
One thing we can count: The Fed will not be tightening anytime soon. So, we could be nearing the safe zone.
Bring it Home …
Knowing tight correlations can really help Income Hunters when building a diversified portfolio that is able to make money in any environment.
As I have been saying, there is a strong negative correlation between mega-cap tech and bond yields, meaning when bond yields are rising you want to get out of longs in names like AMZN, AAPL, etc.
I’ve been long in the energy sector, which was going well until Thursday. The 7% down move in crude was brutal and I lightened up on a couple of positions.
However, I added to my gold call spreads based on the Fed’s increase for inflation expectations over the next couple of months.
I’ll be analyzing crude today and will share what I find.
Until then …
Live and Trade With Passion My Friends,
SOUNDOFF: I always love to hear from readers, so drop a comment below! And be sure to follow me on Twitter @bill_griffo.