Treasury yields continued to slide through mid-week, with the 10-year yield down to 1.25% at one point, the lowest since mid-February, before backing up to 1.36% by the end of the week. That low was also down 45 bps just since mid-May. Although this week’s Fed minutes (June 15-16 meeting) did little to surprise anyone, they confirmed that the Fed was talking about tapering, and there was some acknowledgement that the process might start sooner than they thought (even though patience remains). Markets seem to be ‘selling the news’ of economic reopening; believing that the bulk of the inflation story is indeed transitory (10-year TIPS spreads are down about 30 bps since mid-May, accounting for roughly half the move in yields); and possibly assuming more sluggish medium-term growth after the wave of pandemic spending and stimulus recedes (especially if variants leave the 'new normal' not quite normal).
Meantime, if the rally in longer-term Treasury yields is casting some light on potential medium-term growth concerns, the equity market is rotating away from what was working during the re-opening phase (or at least the period in which the market was pricing in re-opening). Big technology stocks (i.e., the Nasdaq) have been quietly outperforming financials since the spring, after the latter led through the second half of 2020. That was in full effect this week. Similarly, big caps have been outperforming small caps since late-May. The former have helped keep the S&P 500 pushing new highs, while the latter are down 0.8% over the past three months.
The takeaway here might be that the market is eying a slowing growth environment after the 2021H2 run (which should be priced in already); and/or accounting for virus-variant issues.