The Treasury Yield Stress Point

Feb. 22, 2021 11:00 AM ETAAPL, CDNS, GLD, IVOL, TSLA, XLF, SPY, QQQ, EEM, TLT, IEF315 Comments

Summary

  • If Treasury yields continue to rise that may pose a problem for growth stock valuations.
  • However, the Federal Reserve always has the option to intervene and suppress yields, for which the release valve is the currency.
  • A flow chart for dealing with unclear fiscal policy and monetary policy in the coming year or two.
  • Looking for a helping hand in the market? Members of Stock Waves get exclusive ideas and guidance to navigate any climate. Get started today »

Since the third quarter of 2020, most of the global economy has been in a reflationary cycle, meaning that we're getting rising economic activity, rising inflation, and rising long-term Treasury yields from very low levels.

Most asset classes have benefited from it, but going forward if this trend continues, rising Treasury yields would put pressure on overstretched growth stock valuations and financial assets across the board more generally. Those rising yields are less of a problem, but still relevant in multiple ways, for cyclical/value stocks and other assets.

A Global Crash and Bounce

The world had a big deflationary shock in Q1 and Q2 of 2020 as the pandemic and associated economic shutdowns spread around the world.

Commodity prices collapsed first, back when the pandemic was focused on China (a major commodity importer), but then global equities fell when it became clear that the pandemic was spreading globally and that governments were shutting down their economies.

A dollar shortage and liquidity event occurred, and due to this there was even temporary forced-selling of Treasuries and gold at the worst part of the March 2020 crash. The price of WTI crude briefly went negative in April 2020 due to folks having nowhere to store it and being willing to pay someone to take it off their hands.

Starting in late March, a monetary and fiscal response at a scale that hasn't been seen since World War II was initiated by the United States and countries around the world, resulting in a massive increase in broad money supply. Governments ran huge deficits, and their central banks created new base money to buy most of the bonds to pay for those deficits.

In the United States, for example, the Federal Reserve came in with a liquidity bazooka and bought $1 trillion worth of Treasuries in a

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This article was written by

Lyn Alden Schwartzer profile picture
43.75K Followers
Author of Stock Waves
High-probability investing where fundamentals and technicals align!
With a background that blends engineering and finance, I cover value investing with a global macro overlay. My focus is on long-term fundamental investing, primarily in equities but also in precious metals and other asset classes when appropriate.

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My work can be found at LynAlden.com, ElliotWaveTrader.net, and within the Seeking Alpha marketplace where I work with the Stock Waves team to blend their technical analysis with my fundamental analysis for high-probability long-term setups.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IVOL over the next 72 hours.

Additional disclosure: I am long global equities, precious metals, digital assets, and bonds as part of a diversified portfolio.

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