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The S&P 500 fell sharply on the day, 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 have been highlighting the overly bullish options positioning, the risk to upside in rates, and the unpinning of the VIX today. 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.
Mike
Terms by ChatGPT
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Term Premium:
The additional yield investors require to hold long-term bonds instead of short-term bonds, reflecting uncertainty about inflation and interest rate risks.
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Inflation Swap:
A financial derivative where two parties exchange a fixed rate for payments linked to the rate of inflation, typically used to gauge inflation expectations.
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Fed Funds Futures:
Contracts that reflect market expectations of future Federal Reserve interest rate policies. They allow investors to speculate on or hedge against future changes in the federal funds rate.
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Gap Fill:
A technical analysis term describing a price moving back to a previous gap on a chart—an area where no trading activity occurred—typically suggesting a return to a key support or resistance level.
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Rising Wedge:
A technical chart pattern characterised by converging upward-sloping support and resistance lines. It’s generally considered bearish, as prices often break downward from the wedge.
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Bps (Basis Points):
One basis point is equal to 0.01%. An increase of 12 bps in bond yields means yields rose by 0.12 percentage points.
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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