U.S. bond yields bottom out, wary of U.S. stock retracement risk

Key Points.

-The 10-year U.S. bond yield appears to have recovered from its lows, currently holding at 1.67%, and could move back up to recent highs.

-Navellier Private Client Group investment strategist Ivan believes U.S. bond yields will rise this week and will have an impact on stocks, possibly shifting from technology stocks to sectors such as industrials, materials, energy and banks.

-If rates do hit recent lows and rise on the back of higher-than-expected inflation data, then the S&P 500 should move sideways and tech stocks could fall 10-15% from their recent highs.

Earlier, the Federal Reserve predicted that non-farm payrolls would increase by more than a million jobs. However, last Friday’s employment report showed that only 267,000 new jobs were added, which was seriously lower than expected. This result made the U.S. Treasury futures trading hot.

Why the sudden slowdown in job growth? Many observers say that the extension of U.S. unemployment benefits through September is the culprit, because if many people can get as much or more pay just by staying at home, they certainly do not want to return to work.

On Friday, the 10-year U.S. bond yield fell below 1.50% at one point and rose late in the day on the back of the jobs data. From a trading perspective, this suggests that there are many big sellers lurking in the shadows, ready to go long on U.S. bonds.

The 10-year U.S. bond yield has now recovered from its lows, and the unexpectedly good inflation data just released has further pushed up the yield of U.S. bonds, which is now holding at 1.67%.

Navellier Private Client Group investment strategist Ivan believes that U.S. bond yields will rise this week, which in turn will have an impact on the stock market, potentially shifting market capital flows away from technology stocks to stocks in sectors such as industrials, materials, energy and banks.

U.S. equities are trading near new all-time highs, as measured by the S&P 500, which has not seen a material correction since September or October 2020. But the Nasdaq is in much more dramatic turmoil by comparison. In March, the Nasdaq Composite experienced a major shakeout and analysts believe there will soon be a second.

Ivan expects that if U.S. bond yields do hit recent lows, then U.S. stocks could take a hit – the S&P 500 will move sideways and technology stocks could fall 10-15% from their recent highs.

Ivan believes the Nasdaq Composite will fall to the March 2021 lows by the end of the second quarter as U.S. Treasury yields rise, and it makes sense for bulls to make a correction of this magnitude after breaking above the 200-day moving average.

This situation is similar to 2018, where U.S. stocks were also hit by rising U.S. bond yields, but the difference is that in 2018 the Fed is in a rate hike cycle, but this time it is the bond market that is driving rates higher and the killing power should not be as great.

So can gold still be bought?

At the end of March, when the gold price fell below $1,700 per ounce, many investors asked whether they should “sell” gold. But Ivan believes that investors should consider buying opportunities. He expects the gold price to reach a new record high by the end of 2021.

The problem with gold’s sluggishness in the first quarter was that rising U.S. bond yields and a strong dollar put pressure on gold when the prices of many industrial metals were soaring. While industrial metal prices are still soaring and interest rates are likely to rise further, Ivan believes that inflation will rise faster than long-term interest rates and will cause real U.S. bond yields (nominal yields net of inflation) to remain negative and possibly hit new lows.

If the 10-year U.S. bond yield falls to 1.5% this year and inflation spikes to 5% or 6%, then real rates will fall to a 52-week low, which is good for gold; conversely, if U.S. bond yields spike above 2%, then gold and stock market trading will be in disarray.