How will the market react to yields having nowhere left to drop?
This is a chart showing a yield rainbow on a monthly basis, with a chart of $SPX in white, so the idea is to see how $SPX reacts to the movement of treasury yields over time. Treasury yields can't fall too far below the zero line, so we'll inevitably see a compression against the zero line take place and I assume yields will move sideways in a range for the foreseeable future given that any rise in yields will be capped by our ability to pay the interest on our national debt.
How will the market react to yields gyrating sideways around the zero line as opposed to steadily declining? Notice how differently $SPX moved in the period where yields were rising (red arrows) compared to yields falling (green arrows). I'm genuinely curious what people think will happen. It looks concerning to me... what happens if inflation hits hard and we can't raise interest rates enough to fight it because that would make the interest payments on our debt unaffordable? What assets do well in this environment?
Another point of interest in this chart is the fact that shorter term yields are starting to compress with longer term yields, which, in the past, has lead to yield inversion and a bear market / recession. This typically takes years to develop so we may have some time, but we're in a novel environment so it's hard to say what to expect.
How will the market react to yields gyrating sideways around the zero line as opposed to steadily declining? Notice how differently $SPX moved in the period where yields were rising (red arrows) compared to yields falling (green arrows). I'm genuinely curious what people think will happen. It looks concerning to me... what happens if inflation hits hard and we can't raise interest rates enough to fight it because that would make the interest payments on our debt unaffordable? What assets do well in this environment?
Another point of interest in this chart is the fact that shorter term yields are starting to compress with longer term yields, which, in the past, has lead to yield inversion and a bear market / recession. This typically takes years to develop so we may have some time, but we're in a novel environment so it's hard to say what to expect.