Stock Market Hits Rate Pain Threshold Goldman Sachs Warned About

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Just a few days ago, equity bulls were saying that they weren’t too worried about rising bond yields. Rates were still low, they explained, and as long as the pace of increases was orderly, stocks would be fine.

Thursday’s market turmoil may put an end to that argument.

As 10-year Treasury yields added as much as 10 basis points, their total increase for February reached 40 points. That’s more than the 36-point threshold that Goldman Sachs Group Inc. strategists warned could cause trouble for stocks.

Bonds tumbled in early afternoon amid a sudden wave of selling after demand cratered at the Treasury’s 7-year note auction. Equities reacted with a net of 1,739 stocks on a down tick at one point, the second-biggest selling bout this year. Highly-valued shares such as Tesla Inc. led the retreat, while the Nasdaq 100 plunged as much as 3.7%.

Stock Market Hits Rate Pain Threshold Goldman Sachs Warned About

Equity bulls had been brushing aside the risk of higher yields, saying it’s a vote of confidence in the economic recovery that bodes well for corporate earnings. But the rout in fixed income may signal some market adjustments where stocks can’t be spared. In a note earlier this month, Goldman strategists including Ryan Hammond and David Kostin said that stocks typically fall on average in a given month when rates increase by two or more standard deviations, which is 36 basis points in today’s terms.

“This is analogous to a flash crash in Treasuries,” said Arthur Hogan, chief market strategist at National Securities Corp. “We’re finally seeing yields react to what’s likely to be better economic activity.”

“When it happens at a ferocious pace,” he added, “then you have a disarray in the markets” because everyone is “making the assumption that this never stops.”

Funds that rebalance on a monthly basis such as pensions may have contributed to the equity selloff while better-than-expected data on jobless claims added to investor angst over inflation and government stimulus, according to Larry Weiss, head of equity trading at Instinet LLC in New York.

“It can create a bit of trepidation two ways: inflation, which the Fed chair has dismissed, but also support for the argument against a large, broad stimulus package,” Weiss said. “So it’s a general risk reduction, similar to what we saw at the end of January.”

U.S. pension funds that rebalance on a monthly basis will need to sell about $16 billion of domestic stocks to return to prior asset allocation levels following the latest equity rally, according to estimates from Credit Suisse. The S&P 500 has advanced 5.6% this month versus a loss of 1.5% in the Bloomberg Barclays U.S. Aggregate Bond Index.

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