Equity selloff on rising yield – stay calm and stay invested

Given the surge in enthusiasm in US equities, such optimism will not undergo acute reversal simply due to rising bond yields
Chief Investment Office26 Feb 2021
  • Overnight selloff in US government bonds drove risk assets sharply lower
  • Historical data show a gradual rise in inflation is not negative for risk assets
  • Average returns for the S&P 500 are most positive when inflation is 1-3%
  • Percentage of stocks closing above 200-dma suggests that the market is in “overbought territory”
  • Fed Chair Powell reiterated the central bank’s plan to maintain monetary accommodation
Photo credit: AFP Photo

Equities pullback amid rising yields – the start of a sustained downtrend? US government bonds underwent a bout of significant selloff last night as growth expectations accelerate. The US Treasury (UST) 10-yr yield briefly breached the 1.6% mark before closing the session at 1.5%. Sharp spikes in bond yields caught equity investors off guard and this triggered a 2.45% pullback in the S&P 500 Index while the Technology-heavy Nasdaq Index also lost 3.52%.

Last night’s price actions should not come as a surprise. After all, rising inflation is one of the commonly cited risk factors for financial markets this year. The aggressive USD1.9t economic rescue package put forth by the Biden Administration, coupled with the improving rollout of COVID-19 vaccinations in the US, are expected to translate to stronger economic momentum and by extension, rising inflation in the economy.

To ascertain if last night’s equities selloff marks the start of a sustained downtrend, we look at the following factors in our analysis:

  • Long-term relationship between the S&P 500 and inflation
  • Market breadth – narrowing or widening?
  • Tactical positionings – fund flows and stocks closing above 200-dma
  • Trajectory of the US Federal Reserve’s monetary policy stance

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