Yesterday's 14% increase (33 bps) in the yield of the Two-Year US Treasury Note represents the fifth largest one-day increase since 1977. We looked to see how stocks have historically performed following similar large moves. As shown in the table, returns have generally been positive as investors continue to move out of bonds and into stocks. Even more interesting, however, is that five of the ten largest one-day increases in the yield have all come this year.
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I'm surprised that you find this surprising. The two-year note, which mostly reflects investors' anticipations of future Fed rate moves, is of course going to have large increases this year as investors react to the Fed's increasingly hawkish stance on inflation.
The Fed has deviated from Taylor Rule-style moves (appropriately, since there was a crisis), and now has to raise rates to compensate and bring down future inflation.
Similarly, if you had to pick either an "up" or "down" direction for the stock market after these movements in the two-year, you would probably tend to pick "up" since future rate increases imply loose monetary policy at present, which in turn means financial life is good in the very short-term.
Posted by: Thomas Johnson | June 10, 2008 at 01:08 PM