This ace institutional investor — a former head of research at Nomura and Bridgewater Associates and served as a managing director at Goldman Sachs — says he has “never before observed” the trio of falling equities, rising long-term Treasury yields, and declining short-term yields.
What Happened: Jens Nordvig, who is currently the founder and CEO of Exante Data and MarketReader, has highlighted a rare combination between yields and equities that has gripped the market with worries.
As the 30-Year Treasury yield hovered around 4.89% and the two-year Treasury yielded 3.80%, this phenomenon signaled a normal scenario with higher long-term yields and lower short-term yields.
However, this normal curve was followed by a fall in equities as the S&P 500 index was 16.09% lower than its previous record of 6,147.43 points, and the Nasdaq 100 was down 19.86% from its all-time high of 22,222.61 points.
Also, the Dow Jones was 18.09% below its 52-week high of 45,073.63 points.
“Over the last few decades, we have never before observed the combination of dramatic equity declines, declining short-end yields, and notable rises in 30Y rates. Nothing is normal about this,” said Nordvig.
Why It Matters: While an inverted yield curve triggers a correction and points to a possible recession, a normal curve where long-term bond yields are higher than short-term yields is associated with a period of economic growth and increased corporate earnings and stock valuations.
Thus, the condition highlighted by Nordvig was an outlier, which was also accompanied by the falling value of the U.S. dollar.
Another unlikely pattern that has emerged is the divergence of rising yields with respect to the strength of the U.S. dollar.
This was described as the “measure of stress in markets” by Jim Bianco, the president and founder of Bianco Research LLC.
“Higher rates are not supporting the dollar right now. This means they might have to go a lot higher to stop the dollar from falling,” he added.
Typically, higher yields strengthen the dollar via foreign demand for USD assets like Treasuries; however, Bianco’s chart highlights a concerning divergence.
Price Action: The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, rose in premarket on Tuesday. The SPY was up 1.00% to $519.02, while the QQQ declined 0.98% to $437.35, according to Benzinga Pro data.
Meanwhile, the dollar index was 0.15% higher at the 98.42 level.
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