When a key part of the U.S. bond market starts shrugging off new Federal Reserve interest rate hikes or tough talk on inflation, it’s probably time to buy stocks, according to James Paulsen, the Leuthold Group’s chief investment strategist.
To inform his call, Paulsen looked at the relationship between the 10-year Treasury yield TMUBMUSD10Y and the S&P 500 index SPX in several past Fed tightening cycles. He found five periods, since the mid-1980s, when the benchmark 10-year yield peaked, signaling bond investors “blinked,” before the Fed stopped raising its policy interest rate.
A similar patterned emerged in the tightening cycles of 1988-1990, 1994-1995 and it 2018-2019, with a peak 10-year yield signaling the Fed’s eventual end of rate hikes. The benchmark 10-year yield matters to financial markets because it informs prices for everything from mortgages to corporate debt. Higher borrowing costs can slam the brakes on economic activity, even provoking a recession.
I am ready for the blink
So we’re just missing the peak.
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