We Have Entered The Zone When Yields Trigger Market Selloffs
So what happens next? While the answer for equities remains "fluid", the UBS credit team agrees with the recent pieces we published from Nomura's Charlie McElligott and suggests that US yields are reasonably priced for three reasons:
a) the long-end was anchored by fair expectations of neutral rates (even under a scenario where r* is revised higher);
b) the front end included an "uncertainty premium" which would likely decline over time leading to a flatter curve and
c) the market had priced little downside risk to growth (hence we continue to like receiving 1y rates).
Meanwhile, term premia have increased substantially – and could increase further but only if term premia in global rates pick up from here (a weaker dollar would be required for that). The recent bear steepening, extensively discussed by McElligott yesterday, in the 2s10s curve reflects this, supporting UBS' view that the front-end is fairly priced.
Meanwhile, amid bearish signals for the 10Y Treasury (see below) and recent short-term data and oil strength, imply that the market overshoots the "fair range" mid point (between 2.9 and 3% in the UBS forecasts) in the weeks ahead, resulting in further pain for stocks, especially if the move higher is as rapid as it has been so far.