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Why High-Growth Stocks Are Rallying Alongside Yields
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The US 5-Year yield surpassed both the 10 & 30-Year rates since the Fed initiated liftoff, while the 2/10 Treasury yield spread nearly inverted for the first time since 2019. The FOMC’s hawkish yield inverting projections (near-term rate estimates surpassing longer-run target) in its March meeting ignited the latest yield curve inverting action.
A Treasury yield curve inversion (negative 2/10 spread) has been a long-standing and reliable harbinger of looming economic turmoil. However, the present monetary/economic conditions are incomparable to anything in the past as we enter this unprecedented monetary tightening cycle. In fact, the real Treasury yield curve (accounting for inflation) remains normal.
The Fed Drop’s Longer-Run Rate
The Fed Committee is now targeting a 2.8% Fed Funds rate for 2023 & 2024 (from 1.6% & 2.1% in December) but reduced its longer-run Fed Funds projection by -10-bps to 2.4% (lowest in modern history).
A small reduction in the long-term discount rate (even a fraction of a point) sizably drives up terminal values, a significant valuation determinate for high-growth stocks (longer-duration assets because its cash-flows won’t mature for years).
Assuming the aggressive monetary tightening doesn’t send us into a recession, this Fed-induced yield inversion might have bullish long-term implication for well best-positioned future-focused stocks, who are ostensibly looking at easier money policies in the years ahead.
The FOMC’s long-term rate cut generated a market proclivity for longer-duration securities like innovation stocks, benchmarked by Cathie Wood’s Ark Innovation ETF (ARKK - Free Report) , as well as 10 to 30-Year Treasuries, which appear to be holding relatively more buoyant than its shorter-duration counterparts.
The spike in the Central Bank’s near-term rate has investors evacuating short-duration securities like energy (XLE - Free Report) (China's new COVID-lockdowns playing a singificant role here) and fixed income assets with earlier maturities (less than 5 years largely).
Now investors will look towards the upcoming Q1 earnings season to support their bullish/bearish investment thesis.
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Why High-Growth Stocks Are Rallying Alongside Yields
The US 5-Year yield surpassed both the 10 & 30-Year rates since the Fed initiated liftoff, while the 2/10 Treasury yield spread nearly inverted for the first time since 2019. The FOMC’s hawkish yield inverting projections (near-term rate estimates surpassing longer-run target) in its March meeting ignited the latest yield curve inverting action.
A Treasury yield curve inversion (negative 2/10 spread) has been a long-standing and reliable harbinger of looming economic turmoil. However, the present monetary/economic conditions are incomparable to anything in the past as we enter this unprecedented monetary tightening cycle. In fact, the real Treasury yield curve (accounting for inflation) remains normal.
The Fed Drop’s Longer-Run Rate
The Fed Committee is now targeting a 2.8% Fed Funds rate for 2023 & 2024 (from 1.6% & 2.1% in December) but reduced its longer-run Fed Funds projection by -10-bps to 2.4% (lowest in modern history).
A small reduction in the long-term discount rate (even a fraction of a point) sizably drives up terminal values, a significant valuation determinate for high-growth stocks (longer-duration assets because its cash-flows won’t mature for years).
Assuming the aggressive monetary tightening doesn’t send us into a recession, this Fed-induced yield inversion might have bullish long-term implication for well best-positioned future-focused stocks, who are ostensibly looking at easier money policies in the years ahead.
The FOMC’s long-term rate cut generated a market proclivity for longer-duration securities like innovation stocks, benchmarked by Cathie Wood’s Ark Innovation ETF (ARKK - Free Report) , as well as 10 to 30-Year Treasuries, which appear to be holding relatively more buoyant than its shorter-duration counterparts.
The spike in the Central Bank’s near-term rate has investors evacuating short-duration securities like energy (XLE - Free Report) (China's new COVID-lockdowns playing a singificant role here) and fixed income assets with earlier maturities (less than 5 years largely).
Now investors will look towards the upcoming Q1 earnings season to support their bullish/bearish investment thesis.