AMD first above a trillion dollars | Weekend Intelligence #31
A week that began with a record on the Nasdaq and ended with a cautious retreat reminded us that US stocks and US bonds are not playing in tune this year. Long yields climbed to levels the market has not seen in two decades, while the chip sector celebrated another milestone. In Europe, the main theme remained pharmaceuticals and a recovery plan that gave investors no concrete numbers.
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Key points
Why the thirty-year US yield reached its highest since 2004 and how far the sell-off went
What was missing from Novo Nordisk's recovery plan that prevented the stock from losing nearly 8 percent on Monday
How AMD first got above a trillion dollars and why the market simultaneously began hedging Nvidia's debt
Why Wednesday's purchasing managers' index broke the week on Wall Street and how Europe reacted
Three titles in a fair value test and the week's calendar, dominated by Friday's labor market data
30-year yield highest since 2004: the sell-off reached the municipal market as well
Thursday's session pushed the long end of the US curve into a range the market has not seen in two decades. The yield on the 30-year US bond approached 5.5%, the highest since 2004, while the ten-year added 10 basis points to 5.21%, the most since July 2007. The immediate trigger was another jump in oil prices, driven by concerns about inflation and government debt burdens.
The key is where exactly the pressure showed up: between five and thirty years. That is not a bet that the Fed will keep rates higher for the next two quarters, but a demand for higher compensation for holding duration risk for years ahead. The long-maturity premium is returning after being compressed for most of the last decade by central bank purchases and pension fund demand.
The labor market, meanwhile, gives no reason for concessions. New jobless claims fell to 197,000, the lowest since July and near historic lows. Layoffs are not happening, employers are holding onto people — and the hawkish tone of Fed officials gained immediate credibility. Hopes for faster easing have vanished from the curve.
The most interesting spillover occurred in the municipal market. The yield on benchmark 30-year municipal bonds exceeded 5% for the first time since at least 2011. For paper exempt from federal tax, that corresponds to roughly 8% taxable equivalent yield for an investor in the highest tax bracket — a level this asset class has not offered in a generation.
The other side of the trade are issuers. States and cities finance water systems, schools and transportation projects precisely in the thirty-year range, so every 100 basis points makes project financing billions of dollars more expensive across the market. This is followed by postponement of issuance, a shift to shorter maturities, or quiet cuts to investment plans — an effect that will only show up in data with a lag of quarters.
For stocks, 5.21% on the ten-year paper is primarily a discount rate. A price at 19 times expected earnings corresponds to an earnings yield of about 5.3%, i.e. virtually zero premium over the risk-free asset. The most sensitive are long cash flows — growth names with no earnings today, utilities and real estate funds with debt tied to the long end.
The first signal of a reversal will not come from stocks, but from oil and government debt auctions: calming energy prices and solid demand in thirty-year paper auctions would push the premium back down. The opposite direction is a combination of a firm labor market and further energy price increases. Until the long end stabilizes, valuations will adjust to it, not the other way around.
The equilibrium the market is seeking is simple: how high a real yield can an economy with 197,000 jobless claims bear without breaking the most indebted spots — municipal issuers, capital-intensive utilities, and companies refinancing zero-rate era debt.
Novo Nordisk -7.7%: a recovery plan without the numbers the market wanted to hear
Novo Nordisk shares plunged as much as 7.7% in Monday morning trading after the company presented CEO Mike Doustdar's recovery plan at its Capital Markets Day in London. The market expected quantified sales and margin targets. It got a commitment to launch more than five drugs with multiblockbuster potential by 2030 — a promise, not numbers.