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TheStreet Open House

Are Interest Rates About to Spike Again?

Stocks in this article: TLT

NEW YORK (TheStreet) -- We may be at another crossroads here in the U.S. Treasury market.

At the start of the year, long-term Treasury bonds were oversold and sentiment was extremely negative after a horrible year for bonds in 2013. This set the stage for a sharp relief rally in bonds that pushed 10-year Treasury yields down from just over 3% to under 2.6%. The move lower in yields was accompanied by a short-lived, deflationary pulse which resulted in a 6% decline in the S&P 500 from mid-January through early February.

From the low in early February, the U.S. equity markets came roaring back, erasing all of the January decline and closing the month at new all-time highs. The one thing that was noticeably absent from the rally was a commensurate rise in bond yields. Not only did long-term bond yields not rise during the February advance, they actually moved marginally lower (see chart below). The move higher in stocks was not being supported by higher growth expectations via higher bond yields.

With U.S. equities sitting at all-time highs, the divergence is becoming stark. If the equity market bulls are correct in saying the recent downturn in economic data is entirely weather-related and transitory, bond yields should start to move substantially higher from here. Supporting this view is the particularly strong action in cyclical stocks, which tends to be bullish for equities overall and supportive of rising yields.

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