Climbing Treasury yields usually spook stock investors, but Bespoke Investment Group sees a break in this pattern and that could spell good news for the market. Bespoke, in a note, points out that if interest rates were the primary driver of equities, based on the S & P 500, Treasury yields today would stand where they were in mid-June. The sharp jump in yields in the last couple of weeks has not triggered quite the same stock market reaction as earlier this year, when stocks slumped to their June lows. For instance, when the S & P 500 fell to its June low, the 10-year Treasury yield peaked at 3.47%. The yield then slipped back to 2.57% in early August, but it has surged well above 4%, to 4.27% Monday. As of Monday, the S & P 500 closed more than 3% above its June low, though it briefly broke that level in September and early October, adds Bespoke. The S & P 500 was about 1% higher Tuesday afternoon, holding above the key 3,800 level, while the 10-year Treasury yield slipped to 4.10%. “The fact that equities have been able to hang in relatively well despite the surge higher in yields suggests that stocks may be starting to look past the pressure from higher rates,” according to Bespoke. Jim Paulsen, chief investment strategist at Leuthold Group, said he is noticing too that the stock market may be changing, but he adds it is early days and may be too soon to call a trend. He also expects that the 10-year yield may be close to peaking out, as inflation looks like it is starting to roll over. He says the historic correlation between stocks and bonds may be breaking, at least in recent sessions. When yields go up, stocks often react negatively as investors worry about valuations, particularly of high-flying tech and growth shares. “When it goes the other way, it shows a predominant fear of lack of growth,” he said. “I think the stock market is changing its stripes when it comes to yields.” Paulsen said the market may be looking to a point where the Federal Reserve will stop raising interest rates. “If tightening stops, I think it’s a bullish thing even if it stops because of sluggish growth,” he said. Some signs of this change in market tone are evident in the outperformance of small caps and cyclicals, Paulsen says. The S & P Small Cap 600 was up 2.2% Tuesday, and 9% for the month of October, versus a gain of around 7% for the S & P 500. Paulsen said another sign of the changing trend is that the spread between high yield debt and Treasurys is also narrower than it was in June. He said by one measure, the spread is now at 5.36 basis points, versus 6.05 in June. A basis point equals 0.01 of a percentage point.
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