While Wall Street braces for 10-Year Treasury yields to tick over 3 percent, one bond expert believes that will feel like a piece of cake compared to what may come next.
Sit Investment Associates' Bryce Doty believes investors are in "denial" over how high rates could go this year and the painful impact it could have on stocks.
"We didn't pierce 3 percent this time, but the next 10-Year auction in a couple of weeks is probably certain to do that," he said recently on CNBC's "Futures Now." "I think it's going to just keep going. 10, 20 basis points a month gets you to 4 percent in a hurry."
With the 10-Year Treasury yield trading at four-year highs, Doty notes the bond market is now leading the stock market. Thus, he says, another significant leg down for stocks could be imminent.
"Everything has changed. You now have the stock market reacting to an uptick in yields and bonds rather than the other way around," Doty stated. "So, I think it's going to take investors a while to re-calibrate that reality."
Doty calls the environment "surreal" — pointing to the Federal Reserve's intention to keep unwinding a $14 trillion dollar trade. It comes as debt issuance builds to cover exploding budget deficits, sparked by a combination of higher spending and new tax cuts that some analysts warn could make the problem worse.
"If they stop now, what kind of message does that send? It makes people think 'Oh, the economy is going into the tank.' But, no one believes that," Doty said. "So, then they lose credibility. It's a tough, tough corner they've painted themselves into."
A rise in rates to 4.5 percent by year-end would cause a 20 percent to 25 percent decline in equity prices.
While a recent drop in stocks may have been fueled by concerns tied to the 10-year yield approaching 3 percent, many strategists have said they felt equities could continue to rise until reaching 3.5 percent or 4 percent.
A 20 percent to 25 percent drop in stocks, as measured from the S&P 500’s Jan. 26 peak close of 2,872.87, would take the gauge to a range of approximately 2,155-2,298. It closed on Friday at 2,747.30 after dropping as low as 2,581 on Feb. 8 at the apex of the recent volatility-fueled meltdown. If this scenario did play out with Goldman’s numbers, stocks would have a long way further down to go.
Source: Bloomberg Pro Terminal
Jr Trader Alexander Kumanov
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