Justin Lederer Comments: U.S. Equity Market Optimism Vs. The Risk-Off Trade In Treasuries

 June 10, 2016, Seeking Alpha

Is the US stock market inspired by expectations that the Fed will delay interest rate hikes? Or perhaps the crowd anticipates that economic growth will chug along at a healthy rate, despite last week’s news that employment suffered a sharp slowdown in May. Maybe both factors are in play. Whatever the source of the renewed optimism, that’s driving equities higher, the revival of animal spirits in the stock market conflicts with the ongoing and arguably firmer appetite for the risk-off trade in Treasuries. 

Let’s start with the 2-year Treasury yield, which is widely followed as the most sensitive point on the yield curve for rate expectations. Yesterday’s trading left the 2-year at 0.78% (June 8), well below the 0.90%-plus range that prevailed for much of last month, when expectations were widespread that a rate hike was likely at next week’s FOMC meeting. But last week’s disappointing numbers on payrolls for May threw cold water on that idea. 

Meanwhile, the benchmark 10-year yield continues to hold at just above 1.70% rate, which is close to the lowest levels so far this year. In other words, the current yield is close to matching the 10-year’s low rate during the height of pessimism about the US economy’s prospects in February. Four months later, the stock market is bubbling but the 10-year Note seems to be priced for something less-enthralling future.