The speed of the surge in real yields over the past month is now comparable to the Taper Tantrum (left chart), and when we decompose the yield surge, it has been driven mostly by rate expectations rather than by term premium (right chart). This is the “bad” kind of rate rise and puts us into a regime of lower equity returns. We have split up the period since 2010 (when the Fed started impacting term premium) into different regimes based on whether rates are rising or falling and whether it is mainly rate expectations or term premium that is driving the change. In absolute terms the S&P has on average risen in each regime (left chart below, unsurprising given the uptrend in the S&P since 2010), however if we compare the S&P returns vs its own historical average over the whole sample (right chart below), we note that the current regime of rate expectations driving rates higher tends to see below average S&P returns.
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The "bad" kind of rate rise
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The speed of the surge in real yields over the past month is now comparable to the Taper Tantrum (left chart), and when we decompose the yield surge, it has been driven mostly by rate expectations rather than by term premium (right chart). This is the “bad” kind of rate rise and puts us into a regime of lower equity returns. We have split up the period since 2010 (when the Fed started impacting term premium) into different regimes based on whether rates are rising or falling and whether it is mainly rate expectations or term premium that is driving the change. In absolute terms the S&P has on average risen in each regime (left chart below, unsurprising given the uptrend in the S&P since 2010), however if we compare the S&P returns vs its own historical average over the whole sample (right chart below), we note that the current regime of rate expectations driving rates higher tends to see below average S&P returns.