Bond yields are unlikely to retreat until stocks drop further, Barclays said. The Fed won’t to help calm the bond market, and will instead stay on its tightening course. “The only way the Fed could help longer yields is by hiking so aggressively that markets are convinced a recession is imminent and rush to buy longer rates.” Loading Something is loading.
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This week saw a breathless bond sell-off that sent Treasury yields to 16-year highs, crushing stocks in the process, and analysts from Barclays said relief is far from sight.
In a note titled “The beatings shall continue,” Ajay Rajadhyaksha, global chariman of research, said the stock market has to get a lot worse before investors begin piling up on bonds, bringing yields down.
And he doesn’t think the Federal Reserve will step in to still the bond market chaos, saying there is little chance it will stop its quantitative tightening effort to shrink its balance sheet and even lower odds it will restart quantitative easing.
The Fed’s previous bond-buying QE campaigns kept yields low, helping fuel bull markets in stocks and other risk. assets.
“The only way the Fed could help longer yields is by hiking so aggressively that markets are convinced a recession is imminent and rush to buy longer rates. But that is extremely unlikely as well,” he said.
While the Fed has indicated it may hike interest rates even further to clamp down on inflation, its tightening cycle is still expected to end soon.
Weak economic data won’t tip yields lower either, the note said. Barclays’ analysts actually believe that the economy could be re-accelerating, and have recently adjusted their third-quarter GDP outlook to 4%, higher than the 2.4% from the second quarter.
So, according to Rajadhyaksha, something in equities has got to give before we see yields lower.
“Stocks are still up very comfortably for the year,” he said. “And the magnitude of the bond sell-off has been so stunning that stocks are arguably more expensive than a month ago, from a valuation standpoint.”
While the end of the year is typically a strong quarter for the market, stocks currently look overpriced, Rajadhyaksha said.
That’s because as rates have gone up, the prospect of higher borrowing costs has squeezed price-to-earnings ratios, making current stock prices appear relatively high.
“We believe stocks have substantial room to re-price lower before bonds stabilize,” he wrote.