Frogs are awake as yields near 3%.
2 weeks ago I wrote about the US 'goldilocks economy' potentially turning into a 'boiling frog' scenario.
I also mentioned that I thought it unrealistic to expect a frog to remain asleep while being boiled to death, and that we were already seeing some frogs jumping out of the pot.
A recent Bloomberg article provides more evidence of, and reasons for this awakening.
This week, in the wake of US Fed Chair Powell's more hawkish stance on interest rates, the heat was turned up with the benchmark 10 year Treasury bill yield coming the closest it has been to 3% (a psychological plimsoll line) over the past 4 years.
The earnings yield differential between stocks and treasuries is now the lowest it has been for 8 years. It appears to be close to 1.5%, meaning it won't take much to get to an inflexion point where more frogs jump out of the equities pot into more agreeable waters.
Higher yields impact leverage, with debt in New York Stock Exchange margin accounts being the highest on record, meaning highly leveraged frogs might wake up to hot margin calls if and when equities come off the boil.
High yield spreads remain the lowest they have been since before the GFC, indicating complacency and a mispricing of risk, and yet higher rates on the horizon means the end of QE-fuelled cheap money, higher borrowing costs and less water in which to swim around naked.
Moderating this hawkish position are some hints of 'cold water' in the form of potential weakness in the 'synchronised global growth' thematic. If growth stutters, we might see a repeat of the yield 'rise and fall' scenario that occurred between 2013 and 2016 - and this might mean a recalibration of US interest rate hike expectations.
Either way, in this balance sheet run-off/interest rate normalisation era, frogs are waking up and considering their options.
Mike
NextLevelCorporate is a leading strategic corporate advisory firm that independently advises on and arranges innovative corporate finance solutions for clients looking to transform their businesses, in and out of Australia. You can subscribe to our quarterly newsletter here.