Will The Bond Bear Maul The Equity Bull? – March 8, 2021

Rising bond yields have always eventually contributed to economic downturns and equity bear markets.

Bond yields have spiked in the past month around the globe, driven by rising economic expectations and increased demand for insurance against higher inflation down the road. Initial central bank efforts to calm government bond markets have been to no avail, as a consequence of extreme monetary and fiscal policy reflation and signs that this reflation is starting to work.

As highlighted in two reports last week, the timing of the yield spike is problematic for global stocks because most bourses and the stock/bond ratio were extremely overbought, and thus vulnerable to even small shocks. In the short term, equities will remain at risk until bond markets calm.

We remain bearish on bonds and short-term cautious on equities. However, the cyclical uptrend in bond yields is likely to play out in waves, rather than yields soaring in an uninterrupted fashion to the point where the budding economic expansion falters and stocks plunge into a bear market. A pause in bond yields is probable whenever equity markets correct meaningfully and/or economic momentum slows (or is expected to slow). Stay tuned.


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