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Citigroup Questions Conventional Wisdom Of Bond & Equity Relationships

Citigroup Questions Conventional Wisdom Of Bond & Equity Relationships

Historically, bond yields and equity prices are inverse. If bond yields rise, then equities decline and vice versa. With Wall Street continuously over-analyzing the FOMC rate hike probability in effort to prove their worth (news flash, the probability is always 50 percent, they either raise or they don't,), Citigroup has decided to make a splash by saying rising yields and weak equity price returns appears more complicated when reviewing history than what we were taught inside those Ivory towers by academics.

The first point Citigroup's Tobias Levkovich makes references to the 1980s and rising bond yields alongside rising equity prices. He makes no mention of the inflation of the 1970s and Paul Volker's historically unmatched increase of the Federal Funds Rate. One can only assume Levkovich believes the events of the 1970s have absolutely no impact on what happened in the 1980s.

Levkovich says rising yields through the mid-1980s and the mid 1990s were met with rising equity prices (forget Petrol dollar strength, America's internet bubble, and the subsequent early 2000 rate cuts as those things do not matter).

Furthermore, the soaring stock prices in 2012 and 2013 apparently are enough for Levkovich to ignore history (along with the well-known CME incentive program for Central Banks to buy Spooz futures) because he says equities rose as US 10-Year Treasury Yields grew from 1.39 percent to over 3 percent.

Either way, who has time to really analyze the relationships when it comes to pushing out research and Charts of the Day? What matters, according to Levkovich, is that "earnings remain the most powerful force for stocks" and the outlook for equities in the second half of 2016 remains constructive (he did not offer any forecast for equity buybacks, something Goldman Sachs clearly stated would drive equities in 2016)

The mind-blowing manufactured asset price bubble managed by the U.S. Federal Reserve matters not when one can just push a chart of declining yields and rising equity prices while completely ignoring the impact of POMO and four rounds of Quantitative Easing. Below is a annotated chart of the S&P 500 and the subsequent QE action.


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