This is how I think about “the pivot”, or interest rate hikes generally.
There are 4 main baskets where money can be stored: Equities (stocks), Debt (bonds), Cash, and Real estate (land/rentals). There are others.. commodities, FX, artwork… but these are the big pieces of the pie.
If inflation is slowing down, it's the expectation of wall street that the Fed will slow down interest rate hikes and at some point soon, perhaps stop altogether. According to government measurements, inflation is slowing down lately – a lot. This tracks with what I see when I go to Walmart/etc. Retailers are really starting to pump up the promotions to move inventory. Gas prices are not far from where they were pre-pandemic (inflation adjusted). Rents are beginning to adjust down as people renew leases. Houses are sitting on the market much longer.
If interest rate hikes are getting closer to the apex yield, it's no different from a stock market rout where equities are getting near as cheap as they will get. High bond yields mean it's expensive to be a borrower, but great to be a lender. The same way equity offers the best return when it is purchased cheapest.
So when comparing bond yields to stock yields, if a person is expecting the bond yield is nearing it's peak, that's the time institutional money is going to start shifting into bonds and out of something else.
What is the something else? Considering the state of things, probably a mix of real estate and equities. In specific, the lowest yielding (most expensive) equities. Real estate is likely to be a lot slower, as it's not so fast and easy to sell.
So as long as bonds are expected to continue rising for a while yet, I don't expect any big stock rout. At least not because of bonds. Why would there be? Who wants to lock in a 10yr 3% treasury if a 4% treasury is just over the horizon?
When the fed signals they will stop hiking, that's when I would expect an influx out of the expensive equities and into the longer term bonds. If and when the fed eventually backs off and begins tapering, those peak bonds near the pivot will be more valuable than what can be purchased subsequently.
Those bonds are also sold on the secondary market, and a 4% treasury is more valuable when rates are falling and the only thing available from primary sales is a 3%.
Anybody who was lucky or smart enough to buy a bunch of long dated Treasuries in 1981 got to enjoy bond coupons nobody has had access to in US Treasuries since. But at the time there was no telling how high rates were going to have to go, or how long they'd have to stay near that peak. The fed spent most of the 80's figuring it out.
Like all things macro, there's a million factors, all relative to and acting on one another. No telling how they all interact. The best we can do is make generalized guesses and expect to be at least somewhat wrong.
Clear as mud, yeah?
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