Bank of America says surging Treasury yields look like the early stages of the 2022 bond selloff, even as the S&P 500 and Nasdaq keep climbing. Technical strategist Paul Ciana argues the pattern justifies caution and floats hedges through SPY put options.
The 10-year Treasury note yield climbed above 5.2% this week, its highest level since 2007, as elevated oil prices and fresh U.S. data raise the odds the Federal Reserve hikes rates further to quell inflation. The 30-year bond yield also hit its highest level since 2004.
Nasdaq and S&P 500 shrug off the yield spike
Equities have weathered the move well so far. The S&P 500 is up around 1% week to date, while the Nasdaq Composite jumped nearly 2%.
But for BofA technical strategist Paul Ciana, this calm may not last. He points to 2022, when the US 10-year real yield broke out of a trading range and rose from about -1% to 1.5%, a move that coincided with peaks in the S&P 500, the euro and Bitcoin before all three declined, while equity, rates and FX volatility accelerated higher. Ciana says the comparison does not require an identical outcome, but it argues for greater caution.
What happened the last time this pattern showed up
Stocks entered a bear market in 2022 as the Federal Reserve quickly raised rates to fend off a surge in inflation. The S&P 500 fell more than 19% that year, its worst annual performance since 2008, when it tumbled 38%.
Ciana said investors seeking protection may consider one- to three-month SPY 750 puts or 750/730 put spreads, noting the lower strike corresponds to the July lows. According to Ciana: "the rise in real yields is quite stretched on weekly RSIs", and if yields retrace lower while positive S&P seasonal trends hold, the hedges may not perform.
Source: US Top News and Analysis
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