Fed Watch - Are lower yields really what risk assets want?
Nothing comes for free, and a bull steepening of the yield curve is typically not great for risk assets. Will this time be different? Markets better hope so.
***This is a snippet/appetizer from our FULL institutional coverage at www.stenoresearch.com***
Markets are pricing in heavy cuts for next year as inflation keeps coming in soft, making a soft landing the base case for the bulls, but everything comes at a price.
But how are assets likely to perform if the market narrative is correct and yields will indeed come down in a continued bull-steepening fashion, which in our view is the most likely scenario in H1 2024?
We have pulled out some of our cross-asset beta studies from our data-library to provide you with an overview of how assets perform during various yield curve regimes. Keep in mind that the bull-steepening regime historically has rhymed fairly well with recession, but markets are pricing in a substantial bull steepening of the curve - without a recession!
Let’s run through each asset class to see where to put your eggs if a bull-steepening of the yield curve continues into 2024. Prepare for loads of charts and data coupled with short and concise points!
Equities
Equities have historically performed relatively bad during bull-steepening regimes, as a bull-steepening of the yield curve historically has arrived together with a recession of some kind, which is clear based on the rolling betas in chart 1.b, with the beta turning very negative in 1990, 2000 and 2008.
Interestingly, S&P500’s rolling beta to a bull-steepening regime was barely ever positive until 2012-2013 when ZIRP took the stage and has fluctuated around 0-0.1 since, but we are now seeing a return towards 0 again, which could indicate that markets are not as excited about a bull-steepening as previously (or that the bull-steepening comes on the back of weak data).
If the market rally has to continue, you better hope for a bull flattener - and not a steepener.
Read the rest of the study here to find out how to position during a cutting cycle historically → https://stenoresearch.com/watch-series/bull-steepening-watch-is-lower-yields-really-what-risk-assets-want/
You can contact our head of commerce Christoffer Schjonning at christofferschjonning@stenoresearch.dk if you are interested in an institutional coverage, including Bloomberg-chat, running 1on1s and so on.
Chart 1.a: Equity betas to yield curve regimes