The S&P 500 fell sharply yesterday, dropping by around 1.6%, following a weak 20-year Treasury auction, which sent bond yields soaring. None of this should have been a surprise, as I highlighted the overly bullish options positioning, the risk to upside in rates, and the unpinning of the VIX yesterday. It just finally caught up.
The
30-year
was up more than 12 bps on the day and closed at 5.09%, the highest close since October 2023. Can 30-year rates go higher? Yes, they can go much higher, perhaps to 5.5% before this move is over. At least that is what the chart suggests.
Meanwhile, if the
10-year
can manage to rise above 4.6%, there is little stopping it from falling to 4.8%.
More importantly, rates are rising for a couple of reasons, including rising
inflation
expectations, as noted by the 2-year inflation swap, and rising term premiums due to massive deficits and growing debt.
Another reason is that the
Fed
will make fewer rate cuts, with the December Fed Funds Futures now pricing in less than two cuts in 2025.
Of course, the critical reason is that rates are rising globally. Japan just had trouble auctioning off its bonds, and the UK reported hotter
inflation
. So, if rates are going to move up globally, then rates in the US will not be spared.
At this point, it would seem that the S&P 500 broke through its uptrend, and I guess you could even call it a rising wedge. The next stop for the index would be at the gap fill from May 12, and back to 5,660 or so.
There is not much to add, as we have been reviewing all of this for the past week.
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